If a lender agrees to a short sale, will I owe tax on the deficiency?
Typically, if you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be taxable. However, Congress enacted the Mortgage Debt Relief Act of 2007, which allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.
The Mortgage Debt Relief Act applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.
Depending on your state tax laws, however, there may or may not be tax due at the state level on debt forgiven pursuant to a short sale.
Other Short Sale FAQs
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Q:
What is a 'short sale'?
A: A “short sale” is an option for a homeowner to avoid foreclosure when they can no longer afford the mortgage on the home. In a short sale, a … More -
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How long do I have to try to sell my house as a 'short sale'?
A: it depends on your lender's requirements and whether you qualify for any special government sponsored programs helping homeowners avoid foreclosure. … More -
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Can any property be sold as a 'short sale'?
A: typically, if there are any junior liens, mortgages or other debts against the property, those must be cleared first before the property can be sold as a … More -
Q:
What is a Short Sale?
A: A short sale is where a homeowner sells their home for less money than they owe on the property. The owner of the home negotiates a discounted payoff with their … More -
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Do I Qualify for a Short Sale?
A: In order to sell a home in a short sale, the borrower generally must be able to show they are unable to pay their mortgage and currently are experiencing a financial … More -
Q:
Will My Lender Accept the Short Sale as Payment in Full for My Loan?
A: Maybe. Your lender is not required to accept the short sale payment to satisfy your loan amount. The company may decide that you and your property do not qualify for … More -
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Why Would a Lender Agree to a Short Sale?
A: Banks and other lenders generally agree to short sales in order to avoid having to foreclose on a property and take it into their inventory. Most lenders would rather … More -
Q:
Will Selling my Home in a Short Sale Affect My Credit Score?
A: Selling your home in a short sale will negatively affect your credit score, but how much will depend on many factors. Your payment history, your ability to pay other … More -
Q:
Do I Have to Pay a Realtor Sales Commission in a Short Sale?
A: In standard home transactions, the seller and buyer reach an agreement for how the sales commission to a Realtor will be paid. Sometimes a buyer and seller will agree … More -
Q:
What Are the Alternatives to a Short Sale of My Property?
A: A short sale of property may be the best option for curing your current housing problem, but it is not the only option. You may be able to arrange for a loan … More
