In the last few years we have seen our economy struggle with the loss of jobs causing increased unemployment, financial markets in turmoil, health care cost skyrocketing and of course the depressed real estate market.
With the Real Estate Market in trouble we have been seeing more Short Sales and Foreclosures. This in itself is stressful enough for most Americans to handle, but many of us lose sight of the tax ramifications which can make it even worse. This occurs in certain situations when during the short sale there is forgiveness of debt from the financial institution which issued the mortgage on the property and must issue the owner a 1099 form for the value of the mortgage debt cancelled. The IRS had issued the ?Mortgage Forgiveness Debt Relief Act of 2007? to help people cope with this issue. However, people who have owned their home for a long period of time may still realize gains and owe taxes despite this relief and what if the property was for investment purposes and not your primary residence.
The above can even become more confusing with many people opting for mortgage loan modifications. Although many of these modifications aren?t approved the ones that are pose another issue since part of the debt is cancelled.
The general rule is that if a taxpayer owes a debt that is subsequently cancelled or forgiven, the amount of debt cancelled or forgiven is treated as ordinary income. If the property which secures the debt is taken by the lender, then this becomes a sale which may result in a gain or loss. There are of course exceptions to the rules and certain exclusions that may be applied. The complicated issue is first how the gain or loss is actually computed and secondly, which exception to rules apply, if any. Again, there are differences between primary residence, non business debt,and investment property or business debt.
A foreclosure or repossession is also considered a sale of property and the taxpayer may realize income from this type of transaction. It has also become common for people to seek tax counselling to determine if the tax bite will be less in a short sale or a foreclosure.
The IRS scrutinizes returns that have these characteristics because of the potential tax revenue that can be collected in the case of gains and where exclusions do not apply. So it is imperative that ones seeks professional tax help from a seasoned professional experienced in these types of transactions.
Article Source:
http://EzineArticles.com/?expert=Nick_Orlando
Source: http://finance.shlady.com/how-your-short-saleforeclosure-affects-your-income-taxes.html
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