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    #1

    Short sale, forgiven debt

    My client (a realtor) came up with this question, and I don't know the answer! So I'm turning to "my people!"


    Here it is:

    "I have a client that is considering doing a short sale. They bought the home in 2007, lived in it for 1 year and then relocated due to military orders. They rented it out (taking a monthly loss) in hopes that the market would go up. The value has actually gone down over the last 12 months and they are ready to get rid of it and take the credit hit from a short sale. However, they are concerned that they would have to pay taxes on any forgiven debt because it is no longer their primary residence.

    I know that the mortgage debt relief act of 2007 -- says that if you have a short sale, mortgage restructure, or foreclosure between 2007 and 2012, it was your primary residence, and the loss is less than 2 million.... you do not have to pay taxes on the forgiven debt. But since they did rent it out for the last 12 months will it no longer qualify for this? "

    Thanks for any help you can lend~
    donna
    "I am proud to pay taxes in the United States. The only thing is I could be just as proud for half the money." Arthur Godfrey
    Tags: None
    #2
    Donna, I posted a similar question yesterday...

    Here is my question: Client tells me he lived in personal residence for 28 months before walking away from house and mortgage while being under water by approx $50K. Clients personal residence finally sold "short sale" in Dec 2009 with client still being approx $50K underwater based on sale price. Client converted house in to a rental for 6 mos in 2009. I read TTB 14-10 thru 12 but unless I missed something, I dont recall seeing this covered. Client says all mortgage funds used to acquire and remodel house.

    Any idea how much if any would be forgiven?

    I received on reply about from: mlinder42 who states if my client does not recieve a 1099-C, it is not forgiven but I was at a NATP webinar the other day and I understood them to tell me even w/o the 1099-c or 1099-a, as long as the house qualified for residential for so much time, the debt will be forgiven.

    Comment

      #3
      Forgiven, yes... Taxable?

      Yes, I'm confident the debt is forgiven in a short sale. The question is with the ever-changing tax rules and how much if any, will be taxable.
      The problem arises when they rent the property out even for a short time.

      It is so confusing...
      "I am proud to pay taxes in the United States. The only thing is I could be just as proud for half the money." Arthur Godfrey

      Comment

        #4
        normal circumstances

        I remember reading that if a person had their home for sale and it didn't sell and they rented it to keep it from being empty till it sold, it was not considered being converted to rental property.

        They were protecting their property from being empty and possibly being vandalized.

        Might that be the case with these people?

        Linda

        Comment

          #5
          yes...

          ... that is what happened, they had to rent it. It wouldn't sell. That is going to be the case with many of these short sales. Folks are just trying to salvage anything they can.

          Will this mean that the forgiven debt will not be taxable?
          "I am proud to pay taxes in the United States. The only thing is I could be just as proud for half the money." Arthur Godfrey

          Comment

            #6
            From the IRS website...

            4. Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the tax-relief provision. In some cases, other kinds of tax relief – based on insolvency, for example – may be available

            404 | Internal Revenue Service
            http://www.irs.gov/newsroom/article/0,,id=184704,00.html
            404

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