For troubled homeowners, short sales may be a positive alternative to foreclosure. It provides the homeowner a way out of responsibility for a property they can no longer afford and rescues them from the damaging effects of foreclosure. However, in the rush to process a pre-foreclosure or short sale, the consequences and possible tax implications associated are often overlooked. If you are considering a real estate short sale of your home, please read the following information on possible tax implications related to that sale.
SHORT SALE LAW and TAX IMPLICATIONS
When a creditor settles a debt for less than the original amount owed, the remaining amount or “forgiven debt” is then recorded as a loss by the creditor on an IRS form 1099-C and forwarded to their borrower as well as the IRS. With the exception of certain situations (noted below), borrowers may be required to report the forgiven debt as regular income and may end up responsible to pay taxes on that amount.
During a short sale, when a lender agrees to a short pay, a pay off amount less than you currently owe, that remaining amount can be considered forgiven debt. If the forgiven amount is $600 or more of the debt’s principal, the lender is required to report that on an IRS Form 1099-C and forward copies to the IRS and their borrower. Whether a copy is received from the creditor or not, the IRS requires that the amount is reported as income on their tax return. If the borrower fails to report that income, and the IRS has file of that transaction, a tax bill or audit notice will be issued and may become more costly than the original amount due.
There are several exceptions stated in the Internal Revenue Code. If you were insolvent before the creditor agreed to settle or write off the debt, if the debt was intended as a gift, or if you discharge the debt in bankruptcy, you may not be required to report the income on your tax return. For more information or to see if these circumstances apply to your unique situation, consult a qualified tax professional and or legal counsel.
The information provided is believed to be accurate as of November 24, 2009 and is intended to provide general answers to common questions and should not be a substitute for true legal advice. As a HUD approved nonprofit housing counseling agency, we are not qualified to provide legal and/or tax advice and highly recommend you to seek the advice of an attorney concerning these IRS consequences and not rely on this information to make final decisions. While NPHS strives to keep the information on the web site accurate, complete, and up-to-date, NPHS cannot guarantee, and will not be responsible for any damage or loss related to, the accuracy, completeness, or timeliness of the information provided. Opinions expressed herein are solely those of the contributors or authors and do not represent an endorsement or corporate position of NPHS unless otherwise noted.
