Exceptions To Paying Taxes on the Difference in a Short Sale

If you owe a debt (mortgage) to a lender and through a short sale or foreclosure there is a difference between what you owed on the mortgage and what the house ended up selling for in a short sale or foreclosure, the lender is required by the IRS to issue a tax form 1099 for the difference. This means that you may have to treat that difference as income and pay taxes on it.

The Mortgage Tax Debt Forgiveness Relief Act, which was originally passed in 2007, generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.  However while this important Act was extended for the past few years, it has not yet been extended for 2015.  Congress has the last few years been extending the act retroactively at the end of the year.  So the act was extended for 2014 but this wasn’t enacted until December 31, 2014 and then it was made retroactively.  The same could be done for 2015, 2016, etc.

The popular opinion of experts who track and watch this is that it will likely be extended again, and when it is, it will be retroactive back to the expiration date.  However, even if it is not extended there are several other exceptions available for homeowners NOW who are upside down and decide to short sale at both the state and federal level that will not require them to pay taxes on the difference.  These exceptions include insolvency, bankruptcy (if previously filed and the mortgage was included), and non-recourse.  We can discuss all of these in more detail and we always recommend that you also discuss your situation with a qualified and experienced tax professional who understands and appreciates 1099 issues and exceptions available to those who short sale.

Call today for a free attorney consultation to learn if a short sale is right for you.

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