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Short Sale Tax Consequences

Sellers often ask the question, "If I sell my home in a short sale, what are my tax consequences?" While it is always best to consult an accountant or tax professional for a definitive answer, here is some general information on this important topic.

In general, when someone is lent money, it is not considered taxable income unless they are no longer obligated to pay back that money. The amount that is forgiven, or discharged, is considered taxable income.

In a short sale, the mortgage company that agrees to accept a lesser amount than is owed, will issue to the taxpayer (seller) a 1099-C Cancellation of Debt form. Because of the burden this would impose on so many taxpayers involved with short sales, legislation was passed to alleviate the additional reporting income from 1099-C’s. The Mortgage Forgiveness Debt Relief Act and Debt Cancellation enacted in 2007 allows for exceptions to the income reporting as long as the seller qualifies.

According to the Debt Relief Act, taxpayers may exclude debt forgiven on their “qualified principal residence” if the balance of their loan is $2 million or less. Qualified principal residence indebtedness is limited to forgiven or cancelled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes.

Please see the links below for two articles that the IRS recently published on this topic:

One additional note-- the legislation is set to expire at the end of 2012. Look for more information on possible extensions of this legislation as we move closer to the deadline.

DISCLAIMER: This information is intended for educational purposes only and does not constitute legal advice. You should not rely or act upon any information contained in this article without seeking the advice of qualified legal counsel.

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