Tax Liability from Short Sales
Did you know – Loan forgiveness after a short sale can result in tax liability for the seller? The IRS recognizes four situations that will not result in tax liability for the seller, these are:
When seller receives a bankruptcy discharge and the deficiency is included in the bankruptcy
When seller is insolvent at the time of the debt cancellation. Insolvency occurs when the borrowers’ debt exceeds their total assets. Borrower would need to prove this insolvency to the IRS when filing tax return
When the debt is secured by a nonrecourse loan. In a nonrecourse loan, lenders have no legal right to collect delinquency judgment from any borrower assets not pledged to secure the loan. When the resulting tax liability on a cancellation of a debt on a investment property can be offset against other business liabilities and expenses. This exception will not apply to properties occupied as residence by the mortgagor.
Excepted from “Loan forgiveness after the short sale: taxing what isn’t there” by Lance Churchill Tucson Realtor Nov/Dec 2007