The report goes on to note that there were over 90,000 short sales in California last year. That does not count, of course, how many people just walked away. They go on to feature a CPA who notes that most banks in an attempt to “work it out” will not tell you a lot of information to benefit you. And while this may be true, they do very often have fine print (and not so fine) to consult with your tax and/or legal advisors. Some banks do warn in print that a short sale may carry significant tax ramifications. YOU WILL BE ISSUED A 1099-c (cancellation of debt income). There are still some out there telling homeowners they can negotiate out a 1099. You can’t do it! The bank is mandated to provide you , and the government ,a 1099 for any debt that was forgiven (cancelled) on your behalf. That forgiven debt is reported, and is treated as taxable income. YOU MUST get help from a tax person/CPA/attorney. You can’t just ignore that 1099. And remember, if you had more than one loan , you will get a 1099c from each lender in a short sale.
Remember that the IRS (for your federal income tax) passed The Mortgage Debt Relief Act of 2007. This provision generally allows taxpayers to exclude income from the forgiven 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. Be sure you get help to exclude this amount from your income. You have to report this amount of forgiven debt with Form 982 which can be found at this article on the IRS Website: The Mortgage Debt Relief Act of 2007
However, the State of California HAS NOT followed suit for 2009/2010 (so far) and you may find yourself surprised that you have a large tax bill. The homeowner they featured on the news report had received a 1099 for the amount of 135,000 in “cancelled debt.” From that , he owed the state over $13,000. Some are waiting until the very end of the tax filing deadline in hopes the State of California will pass a bill to give short sellers a break. Most don’t see a tax break like this a reality – given the fiscal disaster here in California.
So, the moral of the story here is that I hope you were not shocked or surprised by your tax liability. Hopefully you did consult with an attorney and/or tax professional BEFORE embarking on a short sale, or walking away from your home. The California Association of Realtors (CAR) has a form that is signed at the time you list your property called the Short Sale Listing Addendum. In that form, it explains and warns, that a short sale may have significant tax, legal, credit and recourse implications. Your Realtor should really be making sure you understand that seeing an attorney and/or CPA shouldn’t be “optional” – you really owe it to yourself to know the possibly consequences of a short sale or foreclosure. Homeowners need to take it seriously and consult with a professional . Some attorneys may help you with an “exit strategy” but you have to consult BEFORE you sell the home or for some, it may be too late.
Please remember I am not an attorney, or a tax professional /CPA. I am a REALTOR®
SEEK THE ADVICE OF A COMPETENT TAX ADVISOR AND/OR AN ATTORNEY experienced in tax matters when initiating a short sale or thinking of walking away in a foreclosure. The consequences if you don’t, can be profound.
Be careful. Be sure your advisors (real estate, tax, legal) are competent and experienced. Ask for references. Ask for their “track record.” Be careful if your real estate professional gives you tax or legal advice. That is outside of our scope of expertise.
Catherine Myers
CitiMortgage in Florida has released a new program to try and keep homeowners facing foreclosure to stay in their homes longer.
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