The process of selling a home isn’t always easy, and many homeowners find themselves forced to complete a short sale in order to avoid foreclosure. Though a short sale can prevent serious financial consequences, it also carries tax implications that every home seller should understand.
What is a Short Sale?
A short sale occurs when a home is sold for less than is still owed on the mortgage. For example, a homeowner might still owe a mortgage of $340,000, yet his house is only appraised at $280,000. He would be unable to sell the house at a high enough cost to pay off his mortgage. A short sale would allow that homeowner to sell his house for $280,000, and the bank would forgive the other $60,000 to consider the mortgage as paid in full.
While a short sale helps the bank and homeowner alike avoid foreclosure, it is still a negative mark on the homeowner’s credit report. It is also possible that a short sale will cause tax complications the next April.
Short Sales and Taxes
If you complete a short sale, it is possible that you will owe taxes on the amount that your bank forgave. For instance, if you owed $200,000 on your mortgage but only sold your home in a short sale for $170,000, you could be charged tax on the $30,000 that your mortgage company had to forgive. This is because the forgiven debt is actually considered income by the IRS.
If your short sale debt is discharged in bankruptcy, it is no longer considered taxable income. It’s also possible that you can escape tax payments on your short sale debt if you are considered insolvent at the time of the debt. Insolvency exists when your total debt exceeds the fair market value of all of your assets.
Complex issues such as short sale tax ramifications often require the help and guidance of a qualified lawyer. Before you sell your home in a short sale, contact North Tampa Law Group at (813) 452-4075 to gain a better understanding of exactly how a short sale will impact your life and finances in the future.