Tax Burden On Sellers In A Short Sale Situation?
I've heard that the amount of the short that bank sells a property for will show up as income to the seller- and this can create a significant tax liability:
EX: 200K loan 200K balance, bank shorts to 130K.
Do the owners now have 70K of income to report? If so that would be 20-30K of taxes - a big liability for someone who cant pay their mortgage in the first place.
I'm I totally off base here? Any advice from the experts?
Forgiven debt is considered by the IRS as taxable income. The Short Sellers will receive an IRS form 1099 from the mortgagee which indicates the amount of forgiven debt.
Do the Sellers have an exposure to an income tax liability? Maybe. But probably not.
The IRS imposes a set of tests to determine the Sellers' insolvency at the time the debt was forgiven.
If they were insolvent, all or a portion of the forgiven debt is exempt from taxation.
Most shortsellers are insolvent. Most uninformed shortsellers freak when they get the 1099.
* Freak
meaning to express surprise, displeasure, excitable anguish,accompanied by colorful language and, on ocassion, projectile vomit.