Tax implications
Often, the bank chooses on a short sale to take the loss as a tax write-off.
In case that the property is worth less than the outstanding mortgage the lender
will issue a 1099A for the difference.
For example if the outstanding mortgage amount was $450,000 and the lender accept $370,000. The lender will issue 1099 for $80,000.
If the sale did not cover your debt, and the mortgage company cancelled the debt, you have income in the amount of cancelled debt UNLESS you were insolvent at the time.
If that is the case, then the cancelled debt is not taxable to the extent of your insolvency.
In other words,if your liabilities exceeded your assets by $90,000 and the amount of forgiven debt was $80,000, you would have $10,000 in taxable income.
The Mortgage Forgiveness Debt Relief Act and Debt Cancellation
"If you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be taxable.
The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.
This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition."
Any case is deferent and you have to consult your accountant regarding this matter.
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