Paying Taxes In A Short Sale – Sherman Oaks Homes

by Mario Acosta on June 11, 2011

in Sellers, Short-Sale

Seek Professional Advice

Every situation is different for each individual, so it’s important for Sherman Oaks homeowners to consult with a tax professional, CPA, tax attorney or someone who is qualified to make this determination for you.  But here is some information to get you started, after which you should confer with a CPA to see if any of this applies to you.

When you do a short sale or a foreclosure, the lender is allowed to write off the loss and pass it on to you as income in the form of a 1099-C.  The IRS considers this income to you as taxable.  For example, you borrowed $200,000 to purchase a home, but were only able to repay the lender $150,000 in the short sale.  In this case, you will receive a 1099-C for the $50,000 and may possibly be taxed on that according to your tax bracket.

Federal Taxes

The Home Mortgage Forgiveness Debt Relief Act of 2007 states if the property is your primary residence and the debt discharged was from the original “purchase money” loan, you will not have to pay taxes for that amount.  Further, if you refinance and used the money to only improve your home, then you may be eligible for exclusion of the taxes as well.  This act has been extended until 2012.

If you refinance your home and pulled the money out for other expenses or it’s not your primary residence, then it is possible that you may have to pay the taxes unless you are eligible for “insolvency.” Find up to date information on this exemption and its rules on the IRS website.

State Taxes

The state of California conformed to the federal tax exemption (Home Mortgage Forgiveness Debt Relief Act of 2007) with its own senate bill 1055 for the year 2008.  A new bill SB 401 extends the tax exemption, with modifications to the Federal Act, through year 2012.  Ask your tax adviser if you qualify for an exemption of the state taxes in a short sale.  There may be taxes imposed for a short sale by the CA Franchise Tax Board.

It is important to understand tax implications can apply to Sherman Oaks real estate whether you do a short sale, deed in lieu or a foreclosure.

Check here for more information on your Sherman Oaks real estate short-sale.

 

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Post by Mario Acosta

Mario has written 117 articles.

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