E.A. Discusses Tax Implications of Short Sales
SHORT SALES, TIPS FOR SELLERS
November 12th, 2009
Enrolled Agent, Earl M. Salter, addressed members of the Shasta Association of Realtors regarding what sellers of over-encumbered homes should expect from the IRS. Homeowners in this predicament should consult with an accountant or enrolled agent prior to pursuing a short sale. It is a viable option for those that took out a purchase money loan to buy the home originally. However, if the property was refinanced or is not the primary residence of the homeowner, selling short could create unwanted income tax liability.
Earl said 95% of the time a property owner has no tax liability if the property was their personal residence and the loan was taken out to purchase the property. These loans are referred to as “non-recourse loans”. A homeowner should make sure their lender will issue a 1099C after the transaction closes. If the lender will not provide this debt forgiveness form, the lender could pursue the loss for up to 10 years. Some lenders are selling these debts to collection agencies which will pursue the homeowner for the amount forgiven. Earl said a good indicator a 1099C will not be issued is when the loan has been sold to investors.
In the event a homeowner is not provided a 1099C, bankruptcy may be the only option to get out from under the debt. To add insult to injury, the IRS may consider any debt forgivness income and tax the “gift” accordingly. The same will happen if a borrower successfully negotiates a loan modification with a principal reduction.
Anyone considering a short sale should consult with a tax professional before determining a course of action. Failure to do so could result in unexpected tax consequences. Contact me if I can be of help.
530-224-6767 or 530-941-7492
BRAD GARBUTT
REALTOR/BROKER ASSOCIATE
REAL ESTATE PROFESSIONALS REAL LIVING
CORNER OF COURT AND PLACER IN REDDING
QUARTER CENTURY LOCAL REAL ESTATE EXPERIENCE
