Many people come to me with their short sale questions, though one of the top questions I get, are about taxes and the implications of a short sale. Of course, I always tell people I’m not a CPA, tax advisor or attorney, and consultation with one of these specialists is key, but I can provide some links to some general state and federal tax information where short sales (or foreclosure is concerned). So here is a brush up on the tax implications of a short sale or foreclosure – essentially “cancelled debt.”
2007 Mortgage Debt Forgiveness Act of 2007:
In part it says:
If you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be taxable.
The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.
This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.
You will get a 1099 early next year, but you will use a form 982 to report the cancelled debt and show why you are exempt from taxes.
California also has the same thing (both of these are temporary through 2012 at this time). California’s is called SB401:
On April 12, 2010, SB 401, the Conformity Act of 2010 was enacted. It allows taxpayers who had all or part of the loan balance on their principal residence forgiven by their lender to exclude the forgiven debt from California gross income. The new law applies to discharges of qualified principal residence indebtedness on or after January 1, 2009, and before January 1, 2013.
Here is the website: http://www.ftb.ca.gov/aboutFTB/newsroom/Mortgage_Debt_Relief_Law.shtml