What is the IRS tax rule on a short sale?

Asked by Desertraven, 85338 Mon Dec 1, 2008

I know a loss is considered a gain, but exactly how is the rule stated; how is it figured? What minus what equals profit, equals tax liability?

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The Hagley G…, Agent, Pleasanton, CA
Mon Dec 1, 2008
the site below has a lot of FAQs that may help
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Angela Clark, Agent, Webster, MA
Mon Dec 1, 2008
Dear Desertraven:

"The house passed H.R. 3648 to amend the Internal Revenue Code of 1986 to exclude discharges of indebtedness on principal residences from gross indcome, by a recorded vote of 386 ayes to 27 nays."

This is the "The Mortgage Forgiveness Debt Relief Act of 2007".

If a lender "forgave" you for a debt, you would have to pay tax as the IRS treated that forgiveness as taxable income. So, if you owe the bank $10,000 and the bank never collected that money and forgave the debt, they would send you a "1099" with the amount of $10,000 and you would have to include that amount on your tax return.

Let's take a step further. You own a house that has a mortgage of $200,000. Let's say, you want to sell it because you can't afford the mortgage payments and you are behind. You find out the house is only worth $180,000 and proceed with trying to sell it. A buyer comes along and will pay full asking price of $180,000 leaving you still owing the lender $20,000. Since you don't have $20,000 to pay, you have to get the lender's permission to sell the house at the lower amount, forgiving you the $20,000 you owe.

So, in the past, you would pay tax on the $20,000 you never paid - the IRS treated it as income. Now, with the "The Mortgage Forgiveness Debt Relief Act of 2007", if the lender forgives you for the $20,000, you won't have to pay tax on it.

There is more to the tax liability on profit regarding homes. You will need to contact a Tax attorney or CPA as each individual is different based on their income, actual profit made etc.
0 votes
Carlos Ramir…, Agent, Mesa, AZ
Mon Dec 1, 2008
The tax rule can be fairly complicated, and it is considered outside our areas of expertise. There have also been some changes with recent legislation. I will advise you to contact a real estate accountant who can give you proper advice, especially since it may vary from case to case.

With that being said, here is some general information: In general, any amount forgiven will be considered by the IRS as a gift, hence it can reported as income to you thru a 1099. Normally you will have to pay taxes on that amount. But the Debt Forgiveness Act will "forgive" those taxes - if you qualify.

Again all of this may or may not apply to you, since there are certain condition to meet to make you qualify.

Good luck!
Web Reference:  http://www.SmartAZRealty.com
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