Short Sale Tax Implications--REWIND

I need to set the record straight it seems, as I've run across information that disagrees with my post regarding short sales & the tax implications for the sellers of short sales. It appears that back in December of 2007, President Bush signed into law the Mortgage Forgiveness Debt Relief Act of 2007 which, for all intents & purposes, removes the former tax consequences that accompanied this type of forgiven debt. So instead of the seller of a short sale being taxed on the shortfall of what is owed on his/her home, the seller can sell his home short with no Federal tax liability. This is truly remarkable, and it's important to note that this law expires on December 31, 2009.

Most importantly, however, is that sellers of short sales consult their CPA or tax professional to ensure that they are completely & professionally informed of any tax consequences that could result from selling their home for less than what is owed.

Here's the article:

The IRS Forgives Until December 31, 2009

Thursday, May 01, 2008 - By Thomas M. Mitchell

If being in default and the threat of foreclosure aren't troubling enough, the thought of the IRS coming around after the fact is sure to keep sellers up all night. They have all heard the stories of being tracked down by the tax man to pay taxes on “forgiven debt.” To them it’s like a bad dream turned into a nightmare, all summed up and justified by a bunch of letters and numbers. But not every code section is necessarily a 4 letter word.

Code Sec 108(a)(1)(B),(C) – better known as 1401, means everything to some homeowners in today’s market … but it only has meaning in light of HR 3648. Then again, Section 163(h)(3)(b) is really the key to the whole thing. Make sense to you?

It doesn’t to your homeowners either. Staring foreclosure in the face they want to know if there is anything they can do. Can you sell their house before the deadline? In most cases your answer would be no because they are completely “upside down” but there are cases in which a short sale could work. And when you broach that subject one of the first questions they may ask is “what is our tax liability if we agree to a short sale?”

While the correct response is that you are neither a tax lawyer nor a CPA, you need to be able to let them know that if they qualify there are some options that may resolve that issue. And it all ties back to December 20, 2007, when President Bush signed into law a new measure giving tax breaks to homeowners who have mortgage debt forgiven. With the passage of the Mortgage Forgiveness Debt Relief Act of 2007, a taxpayer does not have to pay federal income tax on debt forgiven for a loan secured by a qualified principal residence.

Why is this so important? In most instances, debt that is forgiven or cancelled by a lender must be included as (ordinary) income on the seller’s tax return and is taxable. There are a number of terms within the bill that are central to the issue, such as “Acquisition Indebtedness” – and you need to know them.

And don’t forget December 31, 2009. That’s the date when this tax break expires. It only applies to debts discharged from January 1, 2007 to December 31, 2009. And tell your sellers that “being insolvent” as a result of bankruptcy doesn’t count.

http://nationalrealtynews.com/content/templates/default.aspx?a=963&template=print-article.htm