Tax Ramifications of a Short Sale

October 14, 2009 by  
Filed under Blog, Tax Ramifications of a Short Sale

What are the tax ramifications of a short sale?

Unfortunately, homeowners who short sale their property do not always get off the hook completely. Homeowners may not realize that they owe taxes from the short sale until they recieve a 1099.   This may turn certain homeowners away from a short sale, but the truth is if you are facing foreclosure it is still your best option.

Different people will give different information regarding the tax ramifications of a short sale.  From all the information I have gathered it is still a better move to short sale as oppose to get foreclosed on.  There can be major tax consequences to a person who walks away form their proeprty because they have no equity left.

Example:

Mr. Wallace buys a property as his personal residence for $500,000.  He puts $100,000 down and gets a loan of $400,000.  The property has declined drastically due to the economy and the property that he bought for $500,000 is now worth $300,000.  He still owes $380,000 for the mortgage.  Mr. Wallace will not be able to make his payments moving forward due to a hardship.  So he sells the property for $300,000 and the bank forgives him for the remaining $80,000.

According to the tax code, the transaction is considered a sale.  There is no deduction for the loss because the property was used as a personal residence.  Although if the property was foreclosed on the IRS treats  treats it as taxable income, and can tax you on the deficiency balance.

For all homeowners who are facing foreclosure, be sure to plan ahead.

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