Tucson Short Sale Tax Information from The Pottinger Group



It is imperative to seek legal and/or tax advice regarding possible tax implications prior to moving forward in selling a property via a short sale transaction. Dependent on your complete financial situation, there may be tax consequences associated with the short sale transaction.

On all short sales, Lenders must report the amount forgiven to the IRS by filing a 1099 to Sellers for forgiven debt amount. This amount will be reported as ordinary income on the Seller’s tax return filings the following year.


To help illustrate – payoff to Lender is $150,000.00. At close, short sale nets bank $125,000.00. The Lender would ultimately1099 the Seller on the $25,000.00 deficiency amount ($150,000.00 payoff amount less the $125,000.00 net amount). As long a full deficiency waiver issued by lien holder(s) (what we strive for on all short sale transactions), Seller would not be responsible for the $25,000.00 deficiency amount, just the tax implications associated with the $25,000.00 on following year’s tax return.



Tucson Short Sale Tax Implications 



On all short sale transactions, Lenders must report the amount forgiven to the IRS by filing a 1099 for the forgiven debt amount. This amount will be reported as ordinary income on the Seller’s tax return filings the following year, Seller could potentially be responsible for tax implication associated with forgiven amount. However, there are several ways around it.


Tax implications only pertain to recourse loans as non-recourse debt which is forgiven is not treated as taxable income. A majority or first position liens we come across, as long as have not refinanced, are going to be non-recourse loans, which would exclude Sellers from being liable for any sort of tax implications. Recourse loans pertain to HELOC (home equity lines of credit) or loans that have been refinanced to take cash out.


Also, tax implications can be avoided all together if Sellers can be declared by IRS as being insolvent at the time of sale. A person is considered insolvent if his/her debt exceeds the fair market of all his/her assets.


Great link with information advising as to this follows - http://www.alllaw.com/articles/nolo/foreclosure/will-short-sale-tax-consequences.html


As of today, a package remains in with the Senate Finance Committee to push Congress to approve a series of tax benefits extensions which would allow the tax benefits associated with the Mortgage Debt Forgiveness Act, among others, to be be extended through 2015 or 2016. A decision is set to be rendered soon. I will keep you all posted as this progresses. 


Bottom line continues to be: it is imperative to seek any legal and/or tax advice regarding possible taxi mplications associated with a sale.


 

Please feel free to contact me at anytime.