Tax Laws on the Short Sale of a House
Homeowners may take a sigh of relief after a short sale. However, for most the relief only lasts until the next tax year. The Internal Revenue Service enforces tax codes that handle the tax implications of a short sale. Some laws may relieve the former homeowner of a tax burden. Other tax implications depend on the mortgage company’s handling of the debt.
Other People Are Reading
-
Debt Cancellation
-
Some lenders forgive a debt after short sale. In this case, you are no longer obligated to pay the debt, but it does not disappear. The IRS calls the remaining balance a canceled debt and is income. The canceled debt is considered income because it is a debt that you are no longer responsible for. The IRS sees it instead as a windfall of sorts.
1099-C
-
The canceled debt must be recorded on a 1099-C form. The 1099 forms are informational documents that reports exceptions to the regular income. The C in the form title stands for cancellation. The 1099-C records the fair market value of the property, amount of debt canceled, interest and description of the debt, with boxes for disclosing bankruptcy or borrower responsibility.
-
Exception Through 2012
-
Two different legislations were designed to give homeowners forced to perform short sales some relief. The Mortgage Forgiveness Debt Relief Act of 2007 proclaimed canceled debt from a primary residence as nontaxable. These taxpayers can exclude up to two million dollars of canceled debt from their primary residence and up to a million of the mortgage interest. The Act expired in 2010. The Emergency Economic Stabilization Act of 2008 extended the deadline to 2012.
Excluded Debt
-
Excluded by both acts is recourse debt. Recourse debt is that which is not secures by the property. These type of loans include personal loans, credit cards or some equity lines of credit. Nonrecourse loans finance the home, so if the borrower defaults, they can only take the home. In default of recourse loan, the lender can sue for any of the borrower assets that may satisfy the debt. Only nonrecourse debt is covered by the debt cancellation acts.
Insolvency
-
When the debts that you owe exceed the value of your assets, the IRS considers you insolvent. In the case of insolvency even recourse debt may be nontaxable. Insolvent taxpayers need to file Form 982 in order to report this canceled debt to the IRS.
-
References
Resources
- Photo Credit Jupiterimages/liquidlibrary/Getty Images
