Tax Consequences when considering a short sale on your Salt Lake City Home
Most people we talk with who are considering a short sale on
their Salt Lake City Home have the following concern: "Will
I have to pay taxes on the amount the bank loses?" The answer is yes
or no. : ) Of course it is one or the other, but let's discuss when it
will probably be yes and when it will probably be no.
Remember, we are not a CPA's or attorneys, so this is not professional
or legal advice. It is merely to demonstrate what we've seen with
others in this situation to hopefully educate you more about your
situation so you can ask better questions and get better advice from
your CPA and/or attorney.
Here is a quick and simple
assessment to see if you qualify to be exempt from paying taxes on the
amount of 'canceled debt' from the 1099-C, which you may receive after
completing a short sale. If you do a short sale you will not be
required to pay taxes on the loss if you receive a 1099-C when:
- You live in the home (it is your primary/principal residence).
- You purchased the primary residence and never refinanced or pulled out any cash for purposes other than improving your home.
- You do/did a short sale between 2007 and 2012.
- The amount short sold is less than $1M (single or married filing separately) or $2M (married filing jointly).
*****REMEMBER: WE ARE NEITHER CPAs or ATTORNEYS, THIS IS JUST A
QUICK GUIDE! CONSULT WITH A CPA OR TAX ATTORNEY FOR MORE
INFORMATION*****
From
the Mortgage Debt Relief Act regarding what debt qualifies: "...debt
used to buy, build or substantially improve your principal residence,
or to refinance debt incurred for those purposes. In addition, the debt
must be secured by the home. This is known as qualified principal
residence indebtedness. The maximum amount you can treat as qualified
principal residence indebtedness is $1 million or $2 million if married
filing separately."
Option 2 (or option B if you like
letters better) would be to sit down with your CPA and find out if you
would be considered insolvent at the time you short sale the home.
**Insolvency:
If you are insolvent when the debt is cancelled, some or all of the
cancelled debt may not be taxable to you. You are insolvent when your
total debts are more than the fair market value of your total assets.
Finally,
if you do nothing and the home is foreclosed, you will still receive a
1099-A. The bad part about a 1099-A is that the Mortgage Debt Relief
Act only applies to the 1099-C you would receive in a short sale... so
you must prove insolvency in order to not be liable for the taxes on
the amount of loss shown on the 1099-A.
The only consequences
which may be of a concern to you is your credit rating. A foreclosure is
WORSE than a short sale, but for my clients, this is the best part! We
have ways that are VERY successful at helping them remove lates and derogatory comments on credit
and have even successfully removed FORECLOSURES! And this isn't a
'short term fix', this is permanent!
In every case,
please, PLEASE, seek out the advice of a competent CPA and/or attorney.
If you have real estate specific questions, please fill out the form below and let us know how we can help you. You can also call us directly at 801-467-7007.
