I have written several posts advising homeowners in trouble with their mortgage to consult both their attorney and their CPA before agreeing to a short sale.
The Wall Street Journal has written a good post highlighting the potential tax impacts of doing a short sale.
Homeowners could be tax on the gain in their property even if they do not get any cash out of a short sale which is how they always work. Say someone bought a home for $200,000 several years ago and at some point refinanced for $350,000. The property was then sold via short sale and the lender agreed to take say $300,000 as pay off for the loan. This homeowner could be charged tax on the $100,000 gain since they bought at $200,00 and effectively sold at $300,000.
In addition in the above example, assuming the lender forgives the $50,000 debt not collected through the short sale (lender owed $350,000 and received $300,000), the homeowner will have a taxable income of $50,000.
It is not the intent of this post to give specific concrete advice about short sales but rather just alery everyone that there are complex legal and tax issues that must be dealt with. Do not agree to anything before you get this advice. A mistake here could result in a big tax liability.
2 responses so far ↓
1 Teresa // Aug 5, 2009 at 3:29 pm
I heard that there was possible legislation passed in California that would negate tax on forgiven debt. Do you know anything about that?
2 Arn Cenedella // Aug 6, 2009 at 6:34 am
Teresa
good question.
my understanding is as follows:
CA did have a law in effect until Dec 31, 2008 that eliminated any tax on forgiven debt for owner occupied properties.
this law expired at the end of 2008.
with CA’s budget crisis, the law was not automatically renewed.
perhaps new legislati0n has been passed but i am not aware of any.
the Fed government still does not tax forgiven deby as income on a personal residence.
the laws are complex and constantly changing which is why i strongly encourage people to obtain legal and tax counsel before agreeing to short sale.
hope this helps.
Arn
Leave a Comment