Many homeowners who are in distress with underwater mortgages are taking the path of the short sale process to get out from under their mortgage.
In the sales process the real estate agent, the negotiator and the owners lender come together to facilitate the sale of the house to a new buyer. All is well and good with the house being sold, the new buyer living in the house and most important of all the seller moving on with their life after this tramatic experience.
But low and behold the seller gets an envelope in the mail with another frightening IRS form 1099, Miscellaneous Income Form. Many times these forms show income to the seller in the hundreds of thousands of dollars. Of course, the seller does not understand how in anyones wildest imagination losing their home could be considered income by any compassionate individual. They proceed to attack the lender for this evil form being filled out and sent to them, And to the IRS. The bad news is that their lender is appropriately following the law. Any “forgiveness” of a debt (which a short sale is) has to be treated as income according to the IRS rules. This being the case, the income tax on these short sales can rack up a bill in the $10’s of thousands of dollars. And this is compouded byt the fact that this applies to most states and their income taxes as well.
The really good news is that currently there is a federal law, and at least in California, a waiver of this debt forgiveness tax in most cases(this includes my main area of concentration, Sherman Oaks and Studio City.
The really bad news is that on December 31, 2012, this waiver is scheduled to be eliminated. At this time I think it a 50/50 proposition that this short sale tax forgiveness will be renewed. This amounts to a huge amount of money that the California and Federal governments are not collecting. And in these cash strapped times, our government is trying to collect every dollar they can.
Bottom line, if you or anyone you know is looking at a potential short sale, NOW IS THE TIME. The housing market is not going to improve substantially enough any time soon to ease the bad situation. And this gamble could end up costing a huge amount in tax dollars on the short sale or your home.
Blair Thompson specializes in Short Sale Listings in the Sherman Oaks/Studio City area and works with a team of neogtiators who will help the distressed homeowner throughout the preparation, marketing, negotiation, sale, short sale negotiation, and the final sale of their home. Blair can help to point you in the right direction for all these complicated issues to insure that you get the best exit possible.
The above has very technical information that is merely skimmed. None of it should be construed as legal, tax, or accounting advice. Please consult the appropriate professional to get answers you can rely on.