This sections talks about the potential responsibilities of doing a short sale so it’s important to explain the process here. First what will happen is, whenever the bank loses and if they forgive you for paying back any of the difference then the bank will issue what’s called a 1099-C which is a cancellation of debt.
For example, let’s say you owe $500,000 but will sell your property for $400,000 and that is a loss to the bank of $100,000 and they are required by the law to issue a 1099-C which again a cancellation of debt. This can be a taxable event by the IRS or the State of California but there are some exemptions to this and not everyone needs to pay taxes but you need to determine that for yourself. The first of these exemptions is on the federal level is the MDRA (Mortgage Debt Relief Act of 2007) that basically says that this is your primary residence and you have pulled any money out above and beyond the original loan amount then you will be excluded from paying any taxes. What is important about this tax relief currently is that it expires at the end of 2012 meaning you have to short sale your property before December 31st 2012. If you want more information about this, please visit www.irs.gov and search for the Mortgage Debt Relief Act of 2007 or speak with a tax adviser.
There is also a similar provision in the State of California created by California Senate Bill 401. There are slight differences for this state so if you need more information go to www.ftb.ca.gov and search Senate Bill 401 and again talk to your tax adviser.
If this not your primary residence or you have pulled money out above and beyond the original loan amount, there is another provision that is called Filing for Insolvency. This is available both in California and the IRS level. The definition of that is if you have more debts than assets then you could be deemed insolvent and not have to pay any taxes. This is much easier to qualify for you basically just fill a 1 page form to the IRS which is a Form 982 the year after you short sale that property.
This has nothing to do with your credit it does nothing to do with your bank either. This is simply between you and the IRS or the State of California but you need to talk with your tax adviser to determine if any of these apply for you. Some other exemptions are if you filed for bankruptcy or with investment properties you can use capital losses to offset the debt forgiven.
Now I must disclose, I am not a tax adviser and I am not qualified to tell you whether you qualify for one of these provisions and I simply share this information with you so you could have an educated conversation with your own tax adviser. And if you don’t have one, we could provide one for you. If you have your own, that’s great. Just make sure that they are well versed on the Mortgage Debt Relief Act of 2007 and Insolvency. If you don’t know anyone, once again we can get you a free consultation from a tax adviser to assess your situation to determine if you will have any tax exposure before you have to do a short sale and it’s completely free to you.
It’s best to determine this before you start a short sale. Some people may even determine that they have tax ramifications but they still choose to move forward with the short sale because it makes economic sense for them.
Part of my service after you have a free consultation with me is that I provide you with a reference to get a free tax assessment before you decide to do a short sale.
This has been my presentation on “Short Sales and Tax Information”. Give me a call to setup you free, no obligation consultation over the phone or in person and we can go over any specific questions that you have. Thank you very much and I look forward speaking with you.
Thank You very much for listening to my presentation on Short Sales and Tax Information