We are not tax experts so what we've written here is only for informational purposes and should be used as a starting point to further investigate the potential tax savings involved. It is absolutely worth your time and money to consult with an expert in these matters as it could save you thousands of dollars.
As we mentioned in another article, 'Beware The IRS', you could be in for a large tax bill if you utilize a short sale, foreclosure, or deed in lieu of foreclosure. The amount of debt that is 'forgiven' by your lender may be viewed as income for that tax year by the IRS. If you owed $450,000 on your home and you received an offer for $400,000 and your lender accepted the offer ( a short sale) then the IRS would view the $50,000 difference as ordinary income in that tax year. So, you would owe taxes on $50,000. This is a simplistic example and most cases are more complex but the bottom line is that you need to be aware of the potential tax liabilities involved in a short sale.
Is there a way to avoid paying that tax? Possibly. IRS form 982 says, "Generally, the amount by which you benefit from the discharge of indebtedness is included in your gross income. However, under certain circumstances described in section 108, you may exclude the amount of discharged indebtedness from your gross income". The specific instructions are contained in section 108 of the Internal Revenue Code.
One of the 'circumstances' they are referring to is that if you are insolvent before you conduct a short sale then you may be able to 'exclude' the forgiven indebtedness (the amount the lender forgave on the loan) from being added to your gross income for that year. Here are some questions you will need to ask an expert:
These are just a few of the questions that should be asked. But, it may very well be worth it. You can find Form 982
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