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Short Sale Tax Consequences - Sell Your House

Posted Saturday, November 1, 2014

homeowners facing foreclosure because they cannot make their monthly mortgage payments may choose to sell their house via a short sale. A short sale is a legal agreement between the mortgage lender and the homeowner, whereby the lender lets the homeowner sell their home for a lesser amount than what they owe on the loan. It is also an option so sell your house when you need to move and cannot sell your home because you don't have any equity.

Deficiencies in Short Sales
With regards to a short sale, a "deficiency" is the difference in amount between the sale price and the total debt. For instance, a mortgage lender approves a certain short sale for the amount of $200,000. However, the homeowner still owes $225,000. The remaining difference of $25,000 is considered the deficiency. In most states, the financial lender can pursue a personal judgment against the homeowner following the short sale in order to recoup the deficiency dollar amount. 

Taxes and Forgiven Mortgage Debt
If your financial lender happens to overlook, or forgive, the deficiency amount following a short sale, you could still owe taxes on the amount since the IRS considers deficiency as 
taxable income. The idea behind this is that the borrower of the loan who is free from repaying a debt, has essentially gained income in the end. 

Debt and Taxable Income
There are a few key instances where the IRS doesn't consider cancelled debt as income, including:
• Any debts subsequently discharged in bankruptcy aren't considered taxable income. 
• If the taxpayer is insolvent when the debt is canceled, they are not liable to report the debt as income. An individual is deemed insolvent if their total debt is more than the fair market value of their total assets. 
• Certain farm debts are the exception to the rule when it comes to taxable canceled debt. If the debt came about as a direct result of operating a farm,the individual obtained over 50 percent of their income from the previous three years of farming, and their loan is owed to someone or an establishment that is typically proactive in the industry of financial lending, then the canceled debt is usually not deemed as taxable income. 
• Forgiven, non-recourse debt is not considered as taxable income. 

Overall, negotiating a short sale can take a considerable amount of time for all parties involved. Therefore, any homeowner who is contemplating a short sale should closely review the tax implications first before deciding to commit to and finalize a deal with their financial lender. In some cases, home owners may qualify for low-cost or even free assistance from a 
low income taxpayer clinic. Learn more by visiting the IRS site about these cost-saving options. 

Another way to sell your house is to sell your home to a local real estate investor. Local investors will pay cash for your home and close quickly. You will not have to decorate your home for potential home sellers or fix any issues with your house. Get connected with a local home investor and sell your house quickly.