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Short Sales and the IRS
Short sales may have some complicated tax details to them, but when it comes to the IRS, there are some rules that offer some clarification to the process. As a general rule, if a bank or lender is "forgiving debt", it is the same as the taxpayer receiving the forgiven amount as income. According to state laws, banks or lenders that approve/accept short sales (for either a partial or full amount) are legally obligated to send the seller a 1099 form. Due to the sheer volume of short sale activity, some banks simply don't have the manpower or time to send these forms out in a timely manner. In order to understand the IRS's view a little better, read below for some clarifications on what the IRS follows:
* Primary/Principal Residences - Under The Mortgage Forgiveness Debt Relief and Debt Cancellation Act (in effect until 12/30/2012), sellers of a primary residence are forgiven up to $2 million (if married) or $1 million (if single, or filing separately).
* Rental Properties - If the property in question is currently classified as a rental property, or has been rented in the past (and shown on past tax returns), the short sale transaction can be treated as a business loss. The income received by the seller (forgiven debt) will be leveled off by the business loss (sale of the property) on a dollar for dollar basis.
All information courtesy of Ronald S. Webster, Attorney at Law.
As always, please feel free to call me at 239-357-9558 with any of your Real Estate needs or questions....Take care until next time! Jay
