Tax Precautions
Short Sale Tax Precautions
Many homeowners do not realize they may be receiving a large tax bill from the IRS after the short sale of their home. All situations are different and you should always contact an accountant or tax advisor before conducting a short sale to determine your potential tax liability.
As an example let’s assume you purchased your property for $300,000 in 2004. Since that time it has appreciated to $400,000 and you refinanced your loan and now owe $350,000. Now, you need to sell your home but due to the bad market you can only get $300,000 for it. In this case, if your lender accepts the short sale of $300,000 and you owe them $350,000, the IRS considers the $50,000 that was "forgiven" by the lender as "debt relief" income.
Your lender will probably send you a 1099-C in the amount of $50,000 and the IRS will want you to pay taxes on that amount. What are the odds you have that kind of money lying around after going through a short sale on your home? Be cautious regarding your tax obligations BEFORE you consider a short sale, deed-in-lieu-of-foreclosure or foreclosure.
The IRS will use your tax basis on your property to determine your tax obligations so you must be able to figure this amount out. This definitely worth talking to a tax attorney or accountant about!