Short Sale SellersShort Sale Tax Relief
Are there short sale tax ramifications?
Before the current credit crisis, there were bigger short sale tax consequences as the IRS could consider debt forgiveness as income. An individual usually recognizes income when a debt is settled for less than the outstanding balance. The amount is included as income in your tax return and is taxable by the IRS.
The Mortgage Forgiveness Debt Relief Act of 2007 (enacted on 12/20/07, effective from 1/1/07 to 1/1/10), the bank is required to send you a 1099-C for the amount forgiven. The amount forgiven should be shown in box 2.
Here are the basic criteria under The Mortgage Debt Relief Act of 2007:
• Debt must have been debt incurred to acquire, build or substantially improve your principle residence. Debt from a 2nd mortgage or HELOC is not eligible.
• Cancelled debt up to $2,000,000 (Married) or $1,000,000 (Single) is eligible.
• Cancelled debt from investment property and 2nd home is not eligible.
Debt used to refinance your home qualifies for this exclusion, but only to the extent that the principal balance of the old mortgage, immediately prior to the refinancing, would have qualified.
The forgiven debt must be reported on Form 982 and be attached to your tax return. It can be downloaded at IRS.gov or call 1-800-829-3676. If you call to order, allow 7-10 days for delivery.