If you own a property that is not your Principal Residence and agree to a short sale with your mortgage company you may be setting yourself up for a big tax bill. Any debt forgiven by the mortgage company on property that is not your Principal Residence will be considered "Income" to you. The mortgage company will issue form 1099c Cancellation of Debt that you will have to claim on your tax returns. Moreover, the amount forgiven will be considered a "Capital Gain" and taxed accordingly. Worse yet, this tax debt is not dischargeable in bankruptcy.
How do you avoid this tax bill?
Instead of agreeing to a short sale you have to option to declare bankruptcy if you otherwise qualify for same. If you declare bankruptcy, you will discharge your personal liability for the mortgage. By doing this, you will not be responsible to make payments on the mortgage. The mortgage company will retain a lien on the property and will foreclose upon it if payments are not made but they won't be able to sue you for the outstanding balance.
More importantly, the discharged mortgage will not be considered "Income" for taxation purposes. As such, you will avoid having to pay the substantial taxes you would be liable for under a short sale. The net result will be the same, you will have disposed of the property without satisfying the mortgage, but you will save a bundle in taxes.
If you have any questions feel free to contact me at wclos@lawyersmichigan.com
Tuesday, March 22, 2011
Short Sale and The Mortgage Forgiveness Debt Relief Act
Often times when a property owner owes more on a mortgage than the property is worth he/she will enter into an agreement with the mortgage company for a "Short Sale." A short sale is an agreement in which the owner sells his/her property for an amount less than the amount owed on the mortgage and the mortgage company agrees to forgive the remaining balance of the debt.
For example:
-A owes $150,000 to X Mortgage Company
-A's house is only worth $100,000
-X Mortgage Company agrees to take $100,000 to satisfy A's debt
-A sells the house for $100,000
-X Mortgage Company forgives $50,000 in debt
What people often do not realize is that the amount of debt forgiven, $50,000 in the example above, is considered "Income" for taxation purposes. At the end of the year, the mortgage company will issue tax form 1099c Cancellation of Debt to the owner. This income must be reported on your Income Tax Return for that calender year. This income, however, may be excluded from taxation.
In 2007, the Federal Government passed The Mortgage Forgiveness Debt Relief Act. This act allows a debtor to excluded the debt realized on a 1099c if the forgiveness was on his/her Principal Residence. In the above example, if the property A sold via the Short Sale was his principal residence he would not have to pay taxes on the $50,000 realized.
It is important to note that this exemption applies ONLY to Principal Residnces. Any other type of property will be subjected to taxation.
Attached here is a link to the IRS web page on the Mortgage Forgiveness Debt Relief Act for additonal information.
http://www.irs.gov/individuals/article/0,,id=179414,00.html
If you have any further questions contact me at
wclos@lawyersmichigan.com
For example:
-A owes $150,000 to X Mortgage Company
-A's house is only worth $100,000
-X Mortgage Company agrees to take $100,000 to satisfy A's debt
-A sells the house for $100,000
-X Mortgage Company forgives $50,000 in debt
What people often do not realize is that the amount of debt forgiven, $50,000 in the example above, is considered "Income" for taxation purposes. At the end of the year, the mortgage company will issue tax form 1099c Cancellation of Debt to the owner. This income must be reported on your Income Tax Return for that calender year. This income, however, may be excluded from taxation.
In 2007, the Federal Government passed The Mortgage Forgiveness Debt Relief Act. This act allows a debtor to excluded the debt realized on a 1099c if the forgiveness was on his/her Principal Residence. In the above example, if the property A sold via the Short Sale was his principal residence he would not have to pay taxes on the $50,000 realized.
It is important to note that this exemption applies ONLY to Principal Residnces. Any other type of property will be subjected to taxation.
Attached here is a link to the IRS web page on the Mortgage Forgiveness Debt Relief Act for additonal information.
http://www.irs.gov/individuals/article/0,,id=179414,00.html
If you have any further questions contact me at
wclos@lawyersmichigan.com
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