As the housing bubble continues through the system we are still seeing a tremendous amount of questions about what are the tax implications for a short sale or a foreclosure. The problem is there are no easy answers. Here are some guidelines but make sure you work with a tax CPA
to get the full answer for your situation.
The first thing that will affect the tax implications is whether the house is a primary residence, investment, or business. The Mortgage Debt Relief Act of 2007 lets tax payers exclude income for discharged debt on your primary residence for foreclosures. In other terms, if you sell your home for less than the mortgage owed you do not need to declare the difference as income as would have been the case before 2007.
Some key exceptions. You can only deduct the first $2 million. The mortgage must also be for the home. If you have a home equity line of credit or a loan you took out on the house but was not used for home improvements then it is forgiven debt and subject to taxation. A form 982 must be filed for any forgiven debt. Your mortgage company should give you a 1099-C if debt was forgiven over $600.
Short sales are a different matter. Any debt that was forgiven must be reported as income on form 982. The biggest exception is if this is part of a title 11 bankruptcy.
Labels: foreclosure, forgiven debt, form 982, short sale, taxes