What are the tax implication of short sale?
In certain situations where the homeowner has purchased their house, and subsequently refinanced and taken out cash for personal use such as purchase of automobiles, vacations, medical bills, purchase of another piece of real estate, and have added debt onto their current home or current residence - that debt, when it has been forgiven is still subject to income taxes.
TAX CODE SECTION 108
This code allows a homeowner who is "insolvent" or going through a bankruptcy to be excluded from the income tax owed on cancelled debt. A person is considered insolvent when the amount of assets (things you own) is less than your total liabilities (things you owe).
- You can complete a short sale on investment properties as well - however, the investment properties do not fall under the Mortgage Forgiveness Debt Relief Act of 2007 and the debt forgiven on those properties - vacation homes, second homes, rental properties - will be subject to income tax.
Tax Advice Disclosure
To ensure compliance with requirements imposed by the IRS under Circular 230, we inform you that any U.S. federal tax advice contained in this communication (including any attachments), unless otherwise specifically stated, was not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any matters addressed herein.