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  #1  
Old 08-24-2009, 09:28 AM
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Is there income tax on short sales?

Been hearing lately about short sales. A distressed homeowner makes a deal to sell his house for a really low (but market) price which is less than the loan. He gets the mortgage company to accept a full payoff of the loan at a big discount. The example used was a $100,000 mortgage which was paid off in full for $15,000 from proceeds of the sale. According to the talking heads, everyone is happy.

Question - what about income tax implications? If you pay off a credit card account at a discount, they report it to the IRS and you must report that discount as income and pay taxes on it. So what's the deal with short sales. Is it different with short sales or are they just telling part of the story?

Anyone know?
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  #2  
Old 08-24-2009, 09:33 AM
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The Mortgage Forgiveness Debt Relief Act of 2007 says that for foreclosures, short sales and mortgage restructurings for less than the current balance on the mortgage, there will be no tax on the forgiven debt, if...
  • The debt relief was incurred between 2007 and 2009
  • The debt was for purchase and improvement of the house
  • The debt was secured by the borrower's primary residence
  • The amount forgiven was no more than $2 Million for a married couple
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Old 08-24-2009, 10:58 PM
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Thanks Medmech. That's one I missed.
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Old 08-25-2009, 09:34 AM
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Quote:
Originally Posted by Medmech View Post
The Mortgage Forgiveness Debt Relief Act of 2007 says that for foreclosures, short sales and mortgage restructurings for less than the current balance on the mortgage, there will be no tax on the forgiven debt, if...
  • The debt relief was incurred between 2007 and 2009
  • The debt was for purchase and improvement of the house
  • The debt was secured by the borrower's primary residence
  • The amount forgiven was no more than $2 Million for a married couple
Med's explanation above is correct. You should particularly note that these rules apply to "Qualified Principal Residence Indebtedness." This would not include any refinancings for equity cashouts for any other purpose.

See IRS pub 4681 page 7 for an example of this.
http://www.irs.gov/pub/irs-pdf/p4681.pdf
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Old 08-25-2009, 10:56 AM
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A debt forgiven is like income, no?
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Old 08-25-2009, 11:16 AM
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Quote:
Originally Posted by Dee8go View Post
A debt forgiven is like income, no?
You looking for the Cliff notes Tom?
Outside of bankruptcy or insolvency, generally, the answer is yes.
Negotiated credit card settlements are an example of this. Taxable income to the debtor.
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Old 08-25-2009, 11:33 AM
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Originally Posted by dynalow View Post
You looking for the Cliff notes Tom?
Outside of bankruptcy or insolvency, generally, the answer is yes.
Negotiated credit card settlements are an example of this. Taxable income to the debtor.
Not Cliff Notes. I was just consulting my common sense.
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  #8  
Old 08-25-2009, 12:10 PM
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Quote:
Originally Posted by Dee8go View Post
Not Cliff Notes. I was just consulting my common sense.
Although they are in sync on this point, I wish the guys and gals who write the tax laws in Congress had your common sense. I'd have fewer gray hairs.
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