When you are losing your house to a foreclosure or short sale, the last thing you want to think about is taxes. However, there can be very serious tax effects of short sales and foreclosures that you need to be aware of.
Before we go any further, let’s make it perfectly clear that here at D&D Property Solutions we are not lawyers or tax experts. We are real estate experts who have to know a little bit about taxes and how they work with buying and selling homes. Before you take any action, please consult with a local Philadelphia attorney or tax professional.
Now that we’ve gotten that out of the way, let’s break down how going through a short sale or foreclosure could affect your tax situation.
Chances are if you’re going through a short sale or foreclosure, you’ve been through a lot recently. Dealing with losing your house can be an extremely stressful time and the last thing you want to think about is how it’s going to affect your taxes.
Unfortunately, the IRS considers debt that has been forgiven as income and it is taxable. So, if you owe $300,000 on your home and go through a short sale for $250,000, your bank agreed to forgive $50,000. The government considers that income and you will have to pay taxes on it.
Yup, you’re right! It doesn’t seem fair at all and, quite honestly; it probably feels like you’re being kicked while you’re down!
When the economy started to tank and the real estate market imploded, our friends in government actually did something about it. They passed the Mortgage Forgiveness Debt Relief Act of 2007. This allowed people who had defaulted on a mortgage loan to not have to pay taxes on the loan difference “income” as long as they met a series of criteria.
However, this act only covers the years 2007 to 2016. So, unless you entered into a signed agreement for loan forgiveness before December 31st, 2016, the Mortgage Forgiveness Debt Relief Act no longer applies to you.
While it’s not good news that this act expired in 2017, there is still hope for people who don’t want to deal with the tax effects of short sales and foreclosures.
The law allows for two exclusions:
If you’re mortgage debt has been forgiven through bankruptcy, then you don’t have to worry about paying taxes on the forgiven debt. Likewise, if you are personally insolvent (when your liabilities exceed the fair market value of your assets) then you don’t have to worry about the tax effects of short sales and foreclosures.
No, we’re not tax or legal experts but we know real estate inside and out. If you have questions about your foreclosure or short sale, we can guide you through the process. If questions involve tax or legal matters, we know the best people to call.
Let us help you through this difficult period and get you started on the next phase of your life! Call (267) 888-8987 today or contact us here to get started now!