Short sale is a financial transaction done in a situation where a borrower faces financial hardships and falls behind on mortgage payments. In simple words it is a debt negotiation process in which the borrower gets relief from paying the huge amount owed through a sale that is at a value below the outstanding mortgage balance.
However, the seller should be aware of the short sale taxes associated with the process which are largely unavoidable.
The phenomenon of short sale is mainly and largely governed by the Mortgage Forgiveness Debt Relief Act of 2007 and Emergency Economic Stabilization Act of 2008. After the short sale proceedings, the lender is left with a deficit that has been unpaid by the borrower or through the home sale. The lender generates a form which is termed 1099-C Tax Form, in order to officially communicate to the borrower that the deficit or the remaining amount of the loan has been written off and the debt has been discharged. Previously before passing the Mortgage Forgiveness Debt Relief Act, this written off amount was being included by the IRS in borrower’s taxable income. In the year 2007, the Mortgage Forgiveness Debt Relief Act was passed which made provisions for short sellers to exclude the forgiven amount (deficit) from taxable income and this provision will exist until 2012. Otherwise, conventionally, the short sale taxes are paid in proportion to the time period for which the seller owned the property.
We’ve only scratched the surface in regards to short sale taxes. To really understand how your taxes can be affected, you should consult a tax attorney to be sure about the tax provisions that may be applicable.
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