Tax Implications of Doing a Short Sale

Okay first remember my Disclaimer then read on. :)

IRS IMPLICATIONS OF DOING A SHORT SALE
Many homeowners do not realize that they may be in store for a large tax bill from the IRS after the short sale of their home. Every situation is different and you should absolutely have them contact an accountant or tax advisor before conducting a short sale to determine their potential liability.

After the sale of their home any deficiency, any amount the bank is short, they will have to write-off on their end. To do that properly they will submit a 1099-C to the seller for the balance owed that they were unable to pay back. The IRS may look at this as additional taxable income.

What are the odds that they will have that kind of money laying around after just going through a short sale on their home? Sellers should be very careful regarding the tax obligations BEFORE considering a short sale, deed-in-lieu-of-foreclosure or foreclosure.

The IRS will use the tax basis on their property to determine their tax obligations so you might want to be able to figure this amount out.

See our article on IRS Form 982. The form is used to request a "reduction in tax attributes" due to insolvency. This may allow them to avoid having to pay taxes on the debt relief they experienced doing the short sale. Definitely worth talking to a tax attorney or accountant about!