What are the tax consequences of a real estate short sale?

Homeowners have many options when trying to avoid losing their homes to foreclosure. For instance, homeowners can file bankruptcy, turn over the deeds in lieu of foreclosure or complete a short sale. A short sale involves homeowners with the permission of their mortgage lenders are allowed to sale their homes instead of going through the foreclosure process. A short sale has advantages for homeowners. For instance, they can avoid a negative blemish on their credit reports. Another advantage for homeowners is having some control over the sale for their homes.

However, there are tax consequences of a short sale. For instance, homeowners will see a jump in their taxable income. Taxable income typically includes earnings from such sources as employment. However, the Internal Revenue Service (IRS) considers debts forgiven or cancelled by creditors as taxable income. This means that if homeowners sales their homes for less than its actual value, it creates a deficiency. Since the mortgage lender doesn’t go after the homeowners for the amount that is still outstanding, the debt is cancelled. Thus, the deficiency amount is added to the amount of money the homeowners made during that year. As a result, homeowners must pay taxes on that deficiency amount.

A short sale and taxes are complicated. During the years of 2007 to 2009, according to Nolo, the IRS had some exceptions to short sale consequences. Thus, for the current understand of a short sale and any tax consequences, homeowners should contact a lawyer.