What Are the Tax Consequences of a Short Sale?
By Kurt O'Keefe, Detroit Consumer Attorney on May 5, 2009 in Featured, Tax Issues
A short sale (described by Illinois consumer attorney David Leibowitz) allows you to sell your home for less than you owe on it.
Sounds great, but there may be tax consequences of a short sale.
Most short sales involve two or more mortgages, though any home sold for less than what is owed is, by definition, “short” of the money needed to pay the liens.
The lienholders, mortgage companies, must sign off for the buyer to get clear title to the property.
But, signing off on the lien, does not necessarily mean that the debt is forgiven. If any of what you owe on the mortgage note is forgiven by the mortgage company, you will get a 1099-C from them for that year, reporting the forgiven amount as debt forgiveness income to you.
So, if you owed $100,000, and the mortgage holder settled for $50,000, it will report you made $50,000 of income.
It is not considered income by the IRS if you are bankrupt, or, insolvent, that is, not enough assets (property of any kind) to pay your liabilities (debts.
Unless, you are not insolvent AFTER the short sale.
Sound complicated? Better get tax advice before doing your short sale.
But, the IRS does not know that unless you tell them. All they go by is the forms they get. So you need to file the proper form with your tax return if you get one of these 1099-Cs.
And, you need to work out the tax consequences BEFORE you agree to a short sale.
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