AVOID PAYING TAXES ON YOUR SHORT SALE DEFICIENCY!!
O.K., so your Mortgage Company agreed to allow you to do a short sale or maybe to accept a deed in lieu… But they didn’t tell you or maybe you didn’t realize that you might have to pay income tax on any resulting deficiency. Now you’ve received a 1099C for $50,000 or $100,000 or some other amount and you don’t know what to do.
Here is the IRS’s theory on why you owe tax on the deficiency: When you first got the loan, you didn’t owe taxes on it because you were obligated to pay the loan back (it was not a “gift”). However, when you didn’t pay the loan back and the debt was forgiven, the amount that was forgiven became “income” on which you now owe tax.
The IRS learns of the deficiency when the lender sends it an IRS Form 1099C, which reports the forgiven debt as income to you.
Here are the rules:
Loans for your primary residence. If the loan was secured by your primary residence and was used to buy or improve that house, you may generally exclude up to $2 million in forgiven debt. This means you don’t have to pay tax on the deficiency.
- Loans on other real estate. If you default on a mortgage that’s secured by property that isn’t your primary residence (for example, a loan on your vacation home or investment property), you’ll owe tax on any deficiency.
- Loans secured by but not used to improve primary residence. If you take out a loan, secured by your primary residence, but use it to take a vacation or send your child to college, you will owe tax on any deficiency.
BUT, YOU CAN SITLL AVOID PAYING TAXES!!!
DID YOU KNOW THAT IF YOU DID A SHORT SALE ON YOUR 2ND HOME OR INVESTMENT PROPERTY LAST YEAR, YOU CAN STILL AVOID PAYING TAXES???
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All I can say is, “WOW, George!” What insight – kinda scary! Keep up the good work. F & B