Tax Effects from the Short Sale

The tax effects can be very significant on a homeowner. It is advisable to get professional advice from a Tax Attorney and a CPA before the seller will have to pay taxes on the forgiven debt (difference between the indebtness and the sale price of the home). In December 2007, the President signed a new bill, "The Mortgage Forgiveness Debt Relief Act," which forgives the debt for the homeowners who did the Short Sale or Foreclosure on their primary residence in 2007-2009. The homeowner still will receive the 1099-C Form (Cancellation of Debt) from the Lender by the end of the year. After receiving the 1099-C the homeowner should carefully look through the form and check for any discrepancy (the amount of the discharged debt is incorrect). If the homeowner finds any of the information to be inaccurate, the lender should be contacted immediately to correct the mistake and provide the homeowner with the new 1099-C form with accurate information.

The homeowners should use form Form 982 (Reduction of Tax Attributes Due to Discharge of Indebtedness) when filling their tax return. You can get this form by going to www.irs.gov or by calling 1-800-829-3676.

If part of the forgiven debt does not qualify under this act, then the homeowner will have to prove insolvency at the time of the Short Sale transaction or Foreclosure. The homeowner will have to show that their liabilities is bigger than the assets, or file for bankruptcy. The amount that can be forgiven can go up to 2 million dollars (1 million for married couples who file separately) at the time when the loan was forgiven. Debt eligible to be forgiven are those used for building, buying or improving the principle residence and should have been secured by the property. If the homeowner refinanced for the bigger mortgage, part of this debt can also be excluded up to the old mortgage amount. The other thing about this Act is that a homeowner can not apply it to second homes, vacation homes, credit card debts, etc. This Act is design to help the homeowners who were in Foreclosure, or did a Short Sale or Loan Modification for primary residence only.

You can find more information by going to www.irs.gov or www.car.org

Ihor Pochay
REALTOR / SHORT SALE SPECIALIST
Tarbell, Realtors
Cell: (562) 334-7393
Off: (909) 629-6186 Ext. 339
Fax: (909) 629-6710
ihorpochay@tarbell.com
www.MyRealtorIhor.com