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Home » Short Sales Are Changing as of 12/31/2012 – Short Sale Sellers May Soon Get a Tax Bill

Short Sales Are Changing as of 12/31/2012 – Short Sale Sellers May Soon Get a Tax Bill

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Complete a Short Sale and receive a tax bill? This may soon be reality.

Short Sale in San Diego

Short Sales

A home owner who sells their home as a short sale may receive a tax bill from the IRS and from the state taxing authority starting in 2013. This is because federal and state laws suspending these rules are set to expire on 12/31/2012.

This part may sound boring but hang in with me for a minute. Forgiven debt is normally considered income under IRS rules and state tax laws. So, for example, the debt forgiven from a foreclosure or short sale would normally result in the party being forgiven the debt receiving a 1099 form which would be reported to the IRS and state tax authority, which would then treat the forgiven amount as income and collect any income taxes due and owing from that income.

During the housing and financial crisis, around 2007, the federal government and many states changed their tax laws to specifically exempt debt forgiveness resulting from a foreclosure or short sale. Well, those laws are set to expire at the end of this year which means that debt forgiveness will again be considered taxable income. This could be significant given that we see many short sales resulting in anywhere from $75,000 to $200,000 being forgiven in the short sales we are involved in. At a 15% tax rate, $200,000 in income from debt forgiveness results in a $30,000 tax bill, with no other deductions or calculations being considered. (NOTE: Of course, anyone contemplating a short sale or foreclosure should consult appropriate tax and legal advice. The examples here are for illustration purposes only and are not intended to provide tax or legal advice.)

While it is unlikely that the U.S. Congress or California will extend the laws by the ned of this year, there is a possibility that the laws could be extended sometime in 2013 or 2014 – and – be effective retroactively back to 1/1/2013. Keep an eye out for future developments and I will too.

Here’s a good article that came out this week that helps explain the story in more detail.

Call me with any questions.