Published on: Friday, Jul 12, 2013

That is a very good question to ask and should be discussed in more detail with your tax preparer or accountant well in advance of any short sale transaction. But just to give you a general idea, we have provided a list of frequently asked questions below in regards to what the homeowners tax responsibility is.

To clarify, a short sale is just one possible solution available to help homeowners who are unable to continue or are behind on their mortgage payments. In the case of a short sale, the mortgage lender allows you to sell your home for less than the outstanding loan balance and cancels the remaining debt. Sometimes, this cancellation of debt is still considered taxable income and must be reported just like any other ordinary income.

With that said, here are some frequently asked questions regarding short sales and taxes.

When is my short sale taxable?

Usually, a short sale is taxable only if the mortgage terms hold you liable for the full loan amount. Often times in a short sale, lenders will forgive the debt in order to avoid foreclosure. For instance, if the difference in debt and the short sale amount is $50,000, the lender will send you a 1099C form with a report of $50,000 of cancelled debt. You would then enter that information on Form 982 when you file your tax return.

Do I have to pay taxes on the short sale of my primary residence?

In most cases the answer is no due primarily to the Mortgage Forgiveness Debt Relief Act of 2007 . It has been extended through December 31, 2013. It allows up to $2 million of forgiven debt to be eligible for exclusion ($1 million if married filing separately) on primary residences only where the debt is secured by the home.

If the residence is not my primary home, how does that affect my taxes?

If the house or property you are short selling is not your principal residence and is an investment/rental property or a vacation home, then you will most likely have to pay taxes. There are some instances where the cancelled debt is not taxable by virtue of the insolvency exemption. In this case it is best to consult a CPA to advise you on your specific circumstances.

If you are considering a short sale, it would be wise to take advantage of the Mortgage Forgiveness Debt Relief Act before it expires. As with all real estate transactions, there are many other factors that come into play. If you need personal assistance with any short sale services, please contact I Short Sale t oday. 877.907.4678