Tax consequences of a short sale

short sale tax issues

Tax consequences of a short sale

As strange as it may seem the IRS code requires that a borrower defaulting on a loan and having all or part of their debt relieved is subject to a capital gains tax liability on the amount forgiven by their lender.

Taxpayers who are defaulting or negotiating reduced settlements on their mortgages are precisely the folks who are not able to pay the capital gains taxes due per the tax code.

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Congress did act on this issue on December 20, 2007. They enacted the Mortgage Forgiveness Relief Act of 2007.

The act currently provides for the following provisions.

Debt that is now canceled or forgiven by the lender is now excluded from the capital gains tax liability if it meets the following conditions:

• The debt is forgiven in calendar years 2007 through 2012

• The amount of forgiven debt does not exceed $2,000,000.00 for taxpayers who are filing jointly or $1,000,000.00 in the case of taxpayers who are married and file separately in calendar years 2009 to 2012.

• The qualified property must be the primary residence of the borrower.

• The debt must be forgiven as a direct result of the decline of the value of the property.

The lender is still required to issue a 1099-C for the amount of forgiven debt to the borrower. It is the borrower’s responsibility to attach and file an IRS form 982 along with their federal tax return for that year. The tax credit will not be allowed without the Form 982 provided at the time of the filing of the tax return.

The borrower should contact their accountant or tax preparer or go to WWW.IRS.Gov to learn more about this relief from the capital gains tax on the foreclosure, refinance or short sale of their principal residence.