Christian Debt Recovery

Mortgage Debt Forgiveness Act Short Sale

April 14th, 2011 |

Author: Gavin

Tax Implications of a Short Sale

A Denver short sale has many facets, and one of the most important and least understood is the tax implications. There is much misinformation regarding taxation and a short sale so I wanted to highlight the topic and ask that any homeowner with a distressed property contact a CPA or tax attorney to discuss their particular situation.

Often times I am told by a potential client that one of the reasons they would rather let their home go to foreclosure than do a short sale is because they don’t want to be taxed on the transaction. Only being tax liable for a short sale is not correct. Whether the transaction is completed via a Short Sale or a Foreclosure the amount of debt that is foregiven is considered by the IRS as a gain. Any debt above $600 that is forgiven or written off by a lender must be reported to the IRS. The lender should provide the homeowner with a 1099-C Form which gets it name from the form that the IRS provides (the IRS isn’t renowned for their originality!!). Even if you don’t get the form you must assume the institution is going to report the transaction to the IRS. What this means, is that on your next tax return you have to claim this amount as income. This is the case whether you get the amount forgiven via a short sale or a foreclosure.

Using the following example let’s figure out your potential tax liability:

Purchase Price – $400,000.00

Debt Amount – $360,000.00

Auction Price – $300,000.00

From the IRS Website (http://tinyurl.com/2ayv2g):

Use the following steps to compute the income to be reported from a foreclosure:

Figuring Cancellation of Debt Income (Note: For non-recourse loans, skip this section. You have no income from cancellation of debt.)

1. Enter the total amount of the debt immediately prior to the foreclosure.___________
2. Enter the fair market value of the property from Form 1099-C, box 7. ___________
3. Subtract line 2 from line 1.If less than zero, enter zero.___________

The amount on line 3 will generally equal the amount shown in box 2 of Form 1099-C. This amount is taxable unless you meet one of the exceptions in question 2. Enter it on line 21, Other Income, of your Form 1040.

1 – Debt amount is $360,000.00

2 – Auction Price is $300,000.00

3 – Cancellation of Debt amount – $60,000.00

The amount to be entered on the IRS Form 1040 is $60,000.00.

The same calculation is done in a short sale calcuation. The interesting thing is that, according to RealtyTrac.com, a pre-foreclosure home sells for less of a discount than a foreclosure auction home. In the state of Colorado in first quarter of 2011 a home sold at a foreclosure auction is purchased for a greater than 8% discount vs being sold as a short sale (http://tinyurl.com/3m7u7zv). Instead of a market value price of $300,000.00 statistics say your market value would be 8% higher, thus reducing your potential tax liability.

I used the word potential because in 2007 a bill was passed (The Mortgage Forgiveness Debt Relief Act) which 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, qualify for this 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)” .

Basically this means that most homeowners will be eligible to exclude the amount of the 1099-C on their tax return – at least until the end of 2012 calendar year. As always, homeowners should consult with a tax attorney or CPA to see if they are eligible for this exemption but the lesson in all of this is that the tax implications of short sale vs a foreclosure should not be a reason to not complete a short sale.

Darren Hunter

VP – Acquisitions

Venator Properties LLC

MORTGAGE ASSISTANCE RELIEF SERVICES DISCLOSURE

The following disclosure are being made pursuant to the Federal Trade Commission’s Mortgage Assistance Relief Services (“MARS”) Rules (16 C.F.R. Part 322).

IMPORTANT NOTICE: Before using this service, consider the following information:

Venator Properties LLC does not and cannot charge you any upfront fees in conjunction with agreeing to buy your dwelling via a short sale or for providing you any other type of mortgage assistance relief service.

Venator Properties LLC is NOT associated with any government agency or program, and our company is NOT approved by the government or your lender(s).

Even if you accept this offer and use our service to sell your dwelling via a short sale, your lender may not agree to change your loan or approve the short sale.

Venator Properties LLC is not and will not provide you with legal advice or representation.

At this time no one knows how long it will take to complete the short sale. There is no guarantee that the short sale or any other type of mortgage assistance relief service will be approved by your lender(s).

You may stop doing business with us at any time with regard to the short sale, our short sale negotiation services (if any),or real estate brokerage services (if any) which are being provided to you as a part of our effort to buy your house.

You may accept or reject the offer of mortgage assistance including the short sale approval that we may obtain from your lender or servicer. If you reject the offer, you do not have to pay us. If you accept the offer, you may have to pay us a fee of $ 0.00 for our short sale negotiation services. This fee and all other fees associated with the short sale of your dwelling will be listed on the HUD 1 closing statement.

If you stop paying your mortgage, you could lose your home and damage your credit rating.

Any decision to stop or limit communication with your lender should be determined by you and your legal counsel in accordance with the Fair Debt Collection Practices Act.

About the Author

Darren Hunter is the VP of Acquisitions for Venator Properties LLC, A premier Denver Luxury Short Sale Investment Company. Please contact Darren at info@venatorproperties.com or call us at (720) 381-3435 to discuss your Denver Short Sale.

www.venatorproperties.com