America's Legal Group » Mortgage Forgiveness Debt Relief Act

Short Sale – Taxes and Their Implications

admin — Sat, 03 Jul 2010 00:49:51 +0000

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.

Short Sale Part 5: Drawbacks

admin — Fri, 27 Jun 2008 08:37:40 +0000

This is part 5 in our week long series on short sales.

Yesterday: Short Sale Candidates | Today: Short Sale Drawbacks

We’ve been talking all week about short sales and hopefully it’s helped you become more educated on the subject as you weigh your options. It’s important in any discussion to also give you the less positive side and that’s today’s topic. Below are some drawbacks that you should consider. Keep in mind, though, that when you get into a difficult situation such as not being able to afford your home, every option will have consequences and programs such as mortgage loan modification and short sale are generally the best solutions available.

A hit to your credit. The short sale phenomenon is pretty new and it’s hard to say with certainty at this time what the actual hit to your credit score could be. It is widely accepted, though, that it is less damaging than if you were to foreclose. Therefore, you should expect a quicker credit repair with a short sale.

You lose your home. In a perfect world, you would keep your home. With a short sale, obviously, you will be selling it. That can be a tough and emotional realization. However, in a situation where you have to weigh negatives against positives and make a “best-case” choice, having your debt potentially forgiven and being rid of a payment you may not be able to afford may be a favorable outcome.

It takes time. You have to remember that “short” references the sale being done short of the home’s value and not the time it will take to finalize. The process with the lender can be difficult and lengthy. Finder a buyer is never guaranteed. You have to be patient.

There may be tax implications. The Mortgage Debt Relief Act of 2007 largely rendered the tax problem inconsequential. It used to be that forgiven debt could be taxed as income until this law was put into action. It’s still possible that there could be tax implications, so you may be wise to contact a tax professional regarding your situation.

Short Sale Part 2: Taxes Not So Burdensome Anymore

admin — Tue, 24 Jun 2008 19:53:00 +0000

This is part 2 in our week long series on short sales.

Yesterday: Short Sale Popularity | Today: Short Sale Tax Issues | Tomorrow: Don’t Walk Away

Note: The following does not constitute tax advice. It is only meant as an overview to give you a starting point to learn more. If you need tax advice pertaining to a short sale or other loss mitigation service, you should consult a tax professional.

It wasn’t too long ago that a short sale meant a heavy tax burden. A homeowner would have their debt forgiven by the lender (good), but be on the hook for taxes on the thousands of dollars in forgiven debt (bad). The IRS was looking at it as if it was income – kind of hard to accept taxes on phantom income, right? This was hindering borrowers from getting the help they needed as they were simply creating another problem.

Fortunately, the Mortgage Forgiveness Debt Relief Act of 2007 was passed and forgiven debt became much less likely to be taxed. The enacted law is not permanent and only creates a three-year window beginning back on January 1, 2007 and ending December 31, 2009. It could potentially be extended if the need is still there.

With this hurdle cleared, a short sale makes a lot more sense for homeowners and the volume of activity has picked up tremendously. If you think you might need a short sale, consult a professional and find out if you qualify.