Friday, March 02, 2012

Do I Have to Pay Taxes on my Short Sale Debt That Was Forgiven by my Lender?

Question: I did a short sale on my home in 2011, and I received an IRS form 1099 for the difference on what I sold my home for and how much I owed on the mortgage. That's almost $50,000 in extra income I now have to report on my tax return and pay taxes on - and I don't have the money. What can I do? Help!

Answer: Your former mortgage holder sent you a 1099 because the IRS requires any debt that is forgiven to be reported as income. They were required to send them out by February 2nd. The good news is that you won't have to pay taxes on it. Because of all the foreclosures and short sales, the IRS in their divine wisdom and ultimate compassion (yeah, sure) has decided through 2012 not to tax people on income derived from forgiving debt (that was really only received on paper). When you do you taxes you will need IRS form 982. Please consult your tax adviser for more information, and go to the IRS link below:,,id=179414,00.html 

There are still plenty of people out there that owe more than their home is worth in this current real estate market , and if they want to sell they will have to do a short sale (or come up with the difference in cash). Although we are hoping that the IRS will extend the exemption to pay taxes on debt forgiveness incurred during the sale of a home, you can't count on it. If you are considering doing a short sale, you should make sure it happens in 2012 or you could owe thousands in taxes. With the timeline needed to process a short sale, that means you need to get your home on the market by early summer at the latest.

Contact me directly if you want more information on selling your home when you owe more then its market value. 
Jim Armstrong - 978-394-6736

The information above should not be construed as tax advice, but is given just to make you aware of some important tax information. You should always consult your accountant or tax professional for advice.

1 comment:

Felcy said...

Great thoughts you got there, believe I may possibly try just some of it throughout my daily life.