A short sale is an agreement by which a lender agrees to accept an amount that is less than the outstanding towards mortgage payment. Many house owners find short sale an attractive option against foreclosures. Though this provides an easy way out for many, what most people are unaware is the IRS aspect of the story. Short sale is taxable and you also owe revenues to the federal state.
When a lender agrees to short sale credit he agrees to forego part of your debt. The IRS views forgiven debt as an earning and so levy taxes on it. Banks and other private lenders do not refer about taxes on short sale credit negotiations. So, not many people know about the implications of short sale. The best way out is to talk to a short sale attorney.
The waived off debt in a short sale is exempted from taxes for up to $2 million under the Mortgage Debt Relief Act. This law applies to those seeking a short sale on their main residences. Also, it comes into effect only when the debt is forgiven due to the homeowner's insolvency or due to a fall in the property value.
A short sale is not considered an income if the outstanding amount is forgiven due to bankruptcy. In the same way farm based short sale credits are not taxable. This again is applicable if the farm has provided a person with more than 50% of the total earning for three successive years.
Seeking short sale makes perfect sense only if you are eligible for tax exemptions. If not, you need to be ready to give the tax man his cut.
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