What you need to know about the tax consequences of a short sale in Florida

The Tax Consequences of A Short Sale in Florida

Did you know that if a Lender writes off debt in a short sale it’s considered a “taxable event?” The lender tells the IRS about the transaction by submitting a “Cancellation of Debt, Form 1099-C” at the end of the year. The IRS generally considers forgiven debt to be income. For example, if the seller owes $400,000.00 on his/her mortgage and the lender approves a short sale at $200,000.00, the IRS generally considers that $200,000.00 taxable income.

The good news is that the Mortgage Debt Relief Act of 2007 (“the Act”) generally allows for sellers to exclude this income if they are selling their homestead or primary residence. That means that you will not have any tax liability on the 1099 that the lender files. Of course, if you are selling an investment property, the Act will not save you from that tax liability.

The bad news is that the Act is set to expire at the end of this year. Unless the government passes a Bill to extend the Act, homeowners will be faced with a very tough decision on who they will want to owe a debt to. It would be difficult to advise any client to short sale their homestead, thereby, owing a large tax liability to the United States government. The tax liability can be significant. On a debt of $150,000.00, a seller in the twenty-five percent (25%) tax bracket could end up owing $37,500.00 in income taxes. In choosing the lesser of two evils, I would advise them to pick the bank almost every time. However, since every situation is unique, it would be wise to speak with your CPA before making any decisions. Sometimes the 1099 will not carry a heavy tax burden for them, after accounting for the amount of losses incurred for that tax year.

Before making any decision in a mortgage foreclosure, the owners should speak with a qualified attorney to determine their rights and their best course of action. At the Morey Law Firm, P.A. our real estate and foreclosure attorneys can help you make that determination. Call us today for a consultation!