Are There Any Tax Implications to Short Sales

Bookmark and Share
The subject of short sales is widely discussed on today's web. There are probably thousands of articles that explain these types of sales in details. However, very few of them are meant for the sole reason of education and not to make people take a desired action upon them. While I'm sure that all of you are already familiar with the term "Foreclosure", some of you might not have a clear understanding of short sales and their implications. Foreclosures happen basically when someone isn't able to afford any mortgage payments. If the hardship that is preventing you from meeting your lender's contract agreement terms is just temporary, then there are many options that you can go through with your lender in order to avoid foreclosure. However, if that is not the case, then you'll inevitably go into foreclosure unless you apply for a short sale and your lender approves it.

While these sales might look like life savers to most people, I can tell you that they have their minuses too. Foreclosure isn't actually the single destination that can ruin your credit score, as this type of sales is also going to make your score drop but not as much as foreclosure does. These sales also have some tax implication that you need to be aware of, and that's what you're going to be learning about next.

It's logical that when your lender approves your sale, the IRS will go after you because of that remaining mortgage balance that you didn't pay. While this remaining balance will be handled by the bank, the IRS will consider it as a taxable income and by that you're required to pay taxes for it. Fortunately for you, President George Bush has passed the "mortgage forgiveness debt relief act" in 2007. This act will indemnify you from paying any taxes when you short sell your property. However, this act will only take effect until the last day of 2012. After that, no one knows if it will be valid or not. The 2 things that I want you to consider when deciding whether to proceed with short sales or not are how much your credit score will drop, and whether you'll be subject of taxes or not. If you are aware of these 2 things, then you can proceed with your sale.

Now that you understand your short sale tax implications, I need you to step back and see if this option is suitable for your situation or not. The worst thing that you can do is acting upon your emotions, so try to let this out of the equation if you want to get out of your financial hardship with the least damage possible.