Tax implications of a short sale
In a Jacksonville FL short sale, a home is sold for less than the balance of the mortgage, with the lender (ideally) agreeing to forgive the remaining debt. This forgiven debt creates a taxable event.
Receiving 1099-C in a successful Florida short sale
The goal of the short sale is of course to have the mortgage debt forgiven by the lender. While that means the homeowner won’t be on the hook for paying the debt back, there is still a tax consequence from the short sale in the form of a 1099-C.
In the eyes of the IRS, if a debt is canceled, forgiven or discharged, this amount is to be included in your gross income, and you must pay taxes on this “income,” unless you qualify for an exclusion or exception.
How does this short sale tax work?
- You owed $250,000 on your mortgage.
- Your lender received $200,000 in an approved short sale, with the lender forgiving $50,000.
- At the end of the year you receive a 1099-C for $50,000.
THIS DOES NOT MEAN YOU HAVE TO PAY $50,000!
What it does mean is you would need to include this $50,000 as taxable income on your return, unless you qualify for an exclusion.
How do I qualify for an exclusion to get out of paying the tax?
- The Mortgage Debt Relief Act, originally created in 2007, has now been extended through 2025 through the Consolidated Appropriations Act (CAA). This act allows homeowners an exclusion from this tax, if the debt resulted from a short sale on their primary residence, up to $750,000.
- Insolvency. Insolvency means your debts exceed the value of all your assets. You can exclude cancelled debt from income up to the amount that you are insolvent. Your best bet as always is to have a discussion with your CPA.
The truth is most folks end up with ZERO tax penalties as a result of their short sale!
Find out how we can help you!
Last Updated on October 17, 2022 by Minna Reid