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Questions regarding short sale and income tax

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Kathy042806
LIF Adult

Member since 5/06

1412 total posts

Name:
Kathy

Questions regarding short sale and income tax

Today we just closed on a property we had bought in 2006 but had given us so many problems, we were behind on payments, facing foreclosure, and finally last year we were approved for a short sale. After much headache everything was done today. Then of course as we're leaving our lawyer decides to tell us that the difference between what was owed and final price can be considered income. I'm not sure if it's "debt forgiveness" but it's well over $200,000. We also live in and own a house in North Bellmore. My husband and I make $100,000 each. We can't get a straight answer as to what happens with that difference. It would be so bad to add over 200g to our income and pay all that tax, but someone had said unless our assets exceed our debt, we should be fine or something like that. We obviously have a mortgage on our house now, which is way more than the "debt forgiveness". Our accountant isn't answering the phone and I know he would be the best one to answer this question, but just wondering if anyone had insight...thank you!

Posted 11/10/14 7:57 PM
 
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MegZee
My bunny

Member since 5/06

8770 total posts

Name:
Meaghan

Questions regarding short sale and income tax

Yes it can be considered income (it was forgiveness of debt). And you can be taxed on it. Is the market value of your current house more than mortgage? Not sure if retirement assets are included in the calculation. Your CPA should know. I'm surprised you were approved for a short sale with that income and owning another house to begin with.

Posted 11/10/14 8:55 PM
 

sunnyplus3
:)

Member since 11/05

8749 total posts

Name:

Questions regarding short sale and income tax

We are in the process of buying a short sale as an investment. We were told that there was some sort of rule that expired 12/31/13 that allowed short sellers to have their debt forgiven. I was told that it may be put back in effect retroactively at some point soon. I have no idea how true this is, but it's being thrown around as an excuse as to why some short sellers may be stalling the closing process in hopes that the debt will be forgiven. Our sellers owe $240k more than we are paying. That's a lot of tax burden for people that are already struggling.
Hopefully one of the resident pros will come to answer your question.

Posted 11/10/14 9:03 PM
 

Kathy042806
LIF Adult

Member since 5/06

1412 total posts

Name:
Kathy

Re: Questions regarding short sale and income tax

Posted by MegZee

Yes it can be considered income (it was forgiveness of debt). And you can be taxed on it. Is the market value of your current house more than mortgage? Not sure if retirement assets are included in the calculation. Your CPA should know. I'm surprised you were approved for a short sale with that income and owning another house to begin with.



The mortgage on the short sale was more than the current market value. We bought it in 06 at 490g, market value now is around 400g or little less. It was purchased for 245g. We owed probably more than 400. Not sure. Our current house has a mortgage left of 380g or so. Does this help??

Posted 11/10/14 9:09 PM
 

MegZee
My bunny

Member since 5/06

8770 total posts

Name:
Meaghan

Re: Questions regarding short sale and income tax

Insolvency info

This might be helpful.

The house you live in and currently own- is that underwater too?

Message edited 11/10/2014 9:25:41 PM.

Posted 11/10/14 9:24 PM
 

Kathy042806
LIF Adult

Member since 5/06

1412 total posts

Name:
Kathy

Re: Questions regarding short sale and income tax

Posted by MegZee

Insolvency info

This might be helpful.

The house you live in and currently own- is that underwater too?




Nooooooo thank goodness we are up to date on it. No late payments

Posted 11/10/14 9:35 PM
 

MegZee
My bunny

Member since 5/06

8770 total posts

Name:
Meaghan

Re: Questions regarding short sale and income tax

Posted by Kathy042806

Posted by MegZee

Insolvency info

This might be helpful.

The house you live in and currently own- is that underwater too?




Nooooooo thank goodness we are up to date on it. No late payments



I mean is your mortgage balance lower than the current market value? (Although yay for being current lol!!)

Posted 11/10/14 9:38 PM
 

Kathy042806
LIF Adult

Member since 5/06

1412 total posts

Name:
Kathy

Re: Questions regarding short sale and income tax

Is my current home part of my current debt? Because then I would be insolvent

Posted 11/10/14 9:40 PM
 

MegZee
My bunny

Member since 5/06

8770 total posts

Name:
Meaghan

Questions regarding short sale and income tax



http://www.irs.com/articles/how-avoid-federal-taxes-short-sales-and-other-debt-settlements

Irs

Insolvency is all your assets and liabilities the day before the cancelled debt.....he irs keeps it nice and confusing!

Message edited 11/10/2014 10:01:40 PM.

Posted 11/10/14 9:47 PM
 

ave1024
I Took The Wrong Road

Member since 12/07

5969 total posts

Name:
That Led To The Wrong Tendencies

Re: Questions regarding short sale and income tax

Posted by Kathy042806

Today we just closed on a property we had bought in 2006 but had given us so many problems, we were behind on payments, facing foreclosure, and finally last year we were approved for a short sale. After much headache everything was done today. Then of course as we're leaving our lawyer decides to tell us that the difference between what was owed and final price can be considered income. I'm not sure if it's "debt forgiveness" but it's well over $200,000. We also live in and own a house in North Bellmore. My husband and I make $100,000 each. We can't get a straight answer as to what happens with that difference. It would be so bad to add over 200g to our income and pay all that tax, but someone had said unless our assets exceed our debt, we should be fine or something like that. We obviously have a mortgage on our house now, which is way more than the "debt forgiveness". Our accountant isn't answering the phone and I know he would be the best one to answer this question, but just wondering if anyone had insight...thank you!




Your house may have debt but it also has equity. To prove insolvency you have to show that you have more debt than assets and show you have more than 200k in net debt.

If your house is worth 400k but you owe 350k, you are actually 50k in the black and now you need to show 250k in debt. Same goes with cars, if you owe 30k on a car but you can trade it in for 35k you are 5k in the black on that.

I have to say you are pretty lucky to have 200k of debt forgiven when you own a house and have 200k in HHI. Personally I think you should pay your taxes and accept that you were just given 200k of free money. I am a little shocked somebody would even question having to pay taxes on this income.

Posted 11/11/14 8:56 AM
 

Kathy042806
LIF Adult

Member since 5/06

1412 total posts

Name:
Kathy

Re: Questions regarding short sale and income tax

Posted by ave1024

Posted by Kathy042806

Today we just closed on a property we had bought in 2006 but had given us so many problems, we were behind on payments, facing foreclosure, and finally last year we were approved for a short sale. After much headache everything was done today. Then of course as we're leaving our lawyer decides to tell us that the difference between what was owed and final price can be considered income. I'm not sure if it's "debt forgiveness" but it's well over $200,000. We also live in and own a house in North Bellmore. My husband and I make $100,000 each. We can't get a straight answer as to what happens with that difference. It would be so bad to add over 200g to our income and pay all that tax, but someone had said unless our assets exceed our debt, we should be fine or something like that. We obviously have a mortgage on our house now, which is way more than the "debt forgiveness". Our accountant isn't answering the phone and I know he would be the best one to answer this question, but just wondering if anyone had insight...thank you!







Your house may have debt but it also has equity. To prove insolvency you have to show that you have more debt than assets and show you have more than 200k in net debt.

If your house is worth 400k but you owe 350k, you are actually 50k in the black and now you need to show 250k in debt. Same goes with cars, if you owe 30k on a car but you can trade it in for 35k you are 5k in the black on that.

I have to say you are pretty lucky to have 200k of debt forgiven when you own a house and have 200k in HHI. Personally I think you should pay your taxes and accept that you were just given 200k of free money. I am a little shocked somebody would even question having to pay taxes on this income.




If we have to pay, we have to pay. There was a lot more to our situation. We started with foreclosure proceedings and avoided it with short sale. We proved hardship since it was impossible carrying 2 mortgages and also going through a separation. I just want to have a definitive answer because I'm still confused regaring the house I still currently have. My current mortgage is over 350. How does this factor in with the debt forgiveness?

Posted 11/11/14 9:10 AM
 

ave1024
I Took The Wrong Road

Member since 12/07

5969 total posts

Name:
That Led To The Wrong Tendencies

Re: Questions regarding short sale and income tax

Posted by Kathy042806

Posted by ave1024

Posted by Kathy042806

Today we just closed on a property we had bought in 2006 but had given us so many problems, we were behind on payments, facing foreclosure, and finally last year we were approved for a short sale. After much headache everything was done today. Then of course as we're leaving our lawyer decides to tell us that the difference between what was owed and final price can be considered income. I'm not sure if it's "debt forgiveness" but it's well over $200,000. We also live in and own a house in North Bellmore. My husband and I make $100,000 each. We can't get a straight answer as to what happens with that difference. It would be so bad to add over 200g to our income and pay all that tax, but someone had said unless our assets exceed our debt, we should be fine or something like that. We obviously have a mortgage on our house now, which is way more than the "debt forgiveness". Our accountant isn't answering the phone and I know he would be the best one to answer this question, but just wondering if anyone had insight...thank you!







Your house may have debt but it also has equity. To prove insolvency you have to show that you have more debt than assets and show you have more than 200k in net debt.

If your house is worth 400k but you owe 350k, you are actually 50k in the black and now you need to show 250k in debt. Same goes with cars, if you owe 30k on a car but you can trade it in for 35k you are 5k in the black on that.

I have to say you are pretty lucky to have 200k of debt forgiven when you own a house and have 200k in HHI. Personally I think you should pay your taxes and accept that you were just given 200k of free money. I am a little shocked somebody would even question having to pay taxes on this income.




If we have to pay, we have to pay. There was a lot more to our situation. We started with foreclosure proceedings and avoided it with short sale. We proved hardship since it was impossible carrying 2 mortgages and also going through a separation. I just want to have a definitive answer because I'm still confused regaring the house I still currently have. My current mortgage is over 350. How does this factor in with the debt forgiveness?




You owing 350k doesnt matter much. What is the house worth? It is likely worth more than 350k right? If so then then you will not be able to use the house as part of the 200k debt forgiveness and you have to pay the taxes.

Posted 11/11/14 9:32 AM
 

Kathy042806
LIF Adult

Member since 5/06

1412 total posts

Name:
Kathy

Re: Questions regarding short sale and income tax

Posted by ave1024

Posted by Kathy042806

Posted by ave1024

Posted by Kathy042806

Today we just closed on a property we had bought in 2006 but had given us so many problems, we were behind on payments, facing foreclosure, and finally last year we were approved for a short sale. After much headache everything was done today. Then of course as we're leaving our lawyer decides to tell us that the difference between what was owed and final price can be considered income. I'm not sure if it's "debt forgiveness" but it's well over $200,000. We also live in and own a house in North Bellmore. My husband and I make $100,000 each. We can't get a straight answer as to what happens with that difference. It would be so bad to add over 200g to our income and pay all that tax, but someone had said unless our assets exceed our debt, we should be fine or something like that. We obviously have a mortgage on our house now, which is way more than the "debt forgiveness". Our accountant isn't answering the phone and I know he would be the best one to answer this question, but just wondering if anyone had insight...thank you!







Your house may have debt but it also has equity. To prove insolvency you have to show that you have more debt than assets and show you have more than 200k in net debt.

If your house is worth 400k but you owe 350k, you are actually 50k in the black and now you need to show 250k in debt. Same goes with cars, if you owe 30k on a car but you can trade it in for 35k you are 5k in the black on that.

I have to say you are pretty lucky to have 200k of debt forgiven when you own a house and have 200k in HHI. Personally I think you should pay your taxes and accept that you were just given 200k of free money. I am a little shocked somebody would even question having to pay taxes on this income.




If we have to pay, we have to pay. There was a lot more to our situation. We started with foreclosure proceedings and avoided it with short sale. We proved hardship since it was impossible carrying 2 mortgages and also going through a separation. I just want to have a definitive answer because I'm still confused regaring the house I still currently have. My current mortgage is over 350. How does this factor in with the debt forgiveness?




You owing 350k doesnt matter much. What is the house worth? It is likely worth more than 350k right? If so then then you will not be able to use the house as part of the 200k debt forgiveness and you have to pay the taxes.




Thank you! This makes more sense now.

Posted 11/11/14 9:45 AM
 

Beth
The Key to your new home....

Member since 2/06

24849 total posts

Name:
Beth

Re: Questions regarding short sale and income tax

you will need a good CPA who is well versed in these types of situations

since the home wasn't currently your primary residence you will most likely be getting a 1099 for $200K this year

Posted 11/13/14 12:07 PM
 
 

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