If a Lender writes off debt in a short sale, it’s a “taxable event,” and the lender tells the IRS about the transaction by submitting a “Form 1099-C, Cancellation of Debt” at the end of the year. Home sellers must acknowledge the amount when they fill out their federal taxes. Through December 31, 2012, however, the federal government forgives any tax liability associated with forgiveness of a mortgage loan of your homestead property.
The IRS generally considers forgiven debt to be income. If a seller has taken out a mortgage in the amount of $300,000 mortgage and the lender accepts $150,000 in satisfaction of the mortgage in a short sale transaction, for example, the seller received the equivalent of $150,000 in free money by government estimates. As a result, the IRS taxes the $150,000 forgiveness. For now and for tax year 2012, however, the government still forgives the debthowever in 2013, it might not.
The tax amount can be significant. On a debt of $150,000, a short-sale seller in the 25 percent tax bracket could end up owing $37,500 in income taxes.
Since short sales can take months and even fall through, homeowners considering a short sale may want to start the process sooner rather than later. Also it is imperative that you contact a Certified Public Accountant in order to ascertain the tax consequences of short sale.
Ray Garcia, Esq.
Board Certified in Real Estate Law
by the Florida Bar
www.rayagrcialaw.com
Law Office of Ray Garcia, P.A.
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