10/17/2017

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Short Sale III
by John M. Roberts

A short sale may present tax and credit consequences for the property owner and should be discussed with a real estate or tax attorney before the escrow closes. The tax implications may be substantial and proceeding with a short sale may or may not be in the best interest of the property owner.

Under a short sale agreement, more than likely there will be a loan deficiency. The balance of the loan is discharged and the debt is cancelled. In certain states, the homeowner may be held liable for the balance of any loan.

Under IRS rules, the forgiven debt may be taxable as "debt discharge income" in addition to any income from capital gains that are owed by the seller. A 1099 tax form is usually issued by the lender.

The Federal Mortgage Forgiveness Debt Relief Act was passed in 2007 to give relief to certain homeowners and exempt them from paying taxes on cancelled mortgage debt.

The Federal Mortgage Forgiveness Debt Relief Act doesn't cover every short sale situation. There are certain rules that apply:

(1) The property on which the loan was taken out must have been used as a homeowner's primary place of residence.

(2) The loan must have been used to buy an existing property.

(3) The loan was used to build a property.

(4) The money must have been used to improve the property the borrower lived in.

(5) If a homeowner borrowed money on property for cash for personal use, the exemptions do not apply.

Before participating in a short sale, it is imperative that you get all the information that will allow you to make informed decisions. You should seek the advice of an attorney or a Certified Public Accountant (CPA) on how a short sale will impact your filing status.

About the author

This information is provided by John M. Roberts of John Roberts Realty located in Moreno Valley, California. You may contact him at jrobertsrealty@yahoo.com.

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