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Chris Pendleton


Shannan Marty

Associate Broker - Realtor®, ABR®,CDPE, CSP, CNE, CSSN, SFR, a-REO, PSC

What are the tax ramifications on a short sale?

Hi Chris Pendleton here, Associate Broker with Tierra Antigua Realty in the metropolitan Tucson Arizona.  We specialize in Short Sales and serve the communities of Tucson, Oro Valley, Marana, Green Valley, Sahuarita and Vail Arizona. 

One of the frequently asked questions I get and sometimes a subject that some homeowners don't consider is 'What are the tax implications of a short sale or foreclosure?'

Now, we always advise our clients to seek independent legal and tax advice and our information is only general in nature and everybody's tax situation is different.

In normal circumstances debt forgiveness is taxable income.  So in other words if you bought your home for $200,000 and it sells as a short sale or is foreclosed on at $100,000 in the eyes of the IRS that is like getting a $100,000 paycheck and they will want taxes paid on that.

With the mortgage forgiveness Debt Relief Act of 2007, a sum of up to two million dollars can forgiven on your principal residence. The limit is one million for a married person filing a separate return. Debt may also be excluded through a mortgage restructure.

The US government has provided relief for these homeowners in the Mortgage Forgiveness Act of 2007.  The Mortgage Forgiveness Debt Relief Act was enacted in December, 2007. This act allows exclusion of income as a result of mortgage modification or foreclosure on your principal property. This relief provided for the years of 2007-2012.

Thorough information about this act is provided on the IRS website: www.irs.gov. Homeowners whose mortgage debt is partially or entirely forgiven may qualify for relief.

In order to qualify for the mortgage debt relief consider these facts:

1.  The debt incurred must have been used to build, buy, or substantially improve your primary residence as well as secured by that residence. Refinanced debt proceeds for the use of improvement of your primary residence also qualify.

2.  Refinanced debt for other purposes such as paying off credit cards does not qualify. Second homes, business and rental properties don’t qualify under this provision

No matter if you do a short sale or are foreclosed upon, you will most likely get a 1099.  The type of 1099 will typically be a 1099-C for cancellation of debt after a short sale and a 1099-A for abandonment for a foreclosure. 

If you debt does not apply under the Mortgage Forgiveness Act, your debt could qualify under an insolvency exclusion. Insolvency happens when the debt liabilities exceed the fair market value of a taxpayer's assets.

It is absolutely critical that you double check with a CPA experienced with short sales or an attorney for further advice and questions.  In facing foreclosure, you need the best tax person, best attorney and the best short sale realtor on your side.

Please call us today for a free consultation on the short sale process.