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What Is My Tax Liability On An Arizona Short Sale?

by Charlie Allred

The Mortgage Forgiveness Debt Relief Act was enacted by congress and applies to the calendar years 2007 through 2012.

When a lender forgives a debt, as in a short sale, the Lender will issue a 1099-C, generally a 1099 creates taxable income that you would be responsible.  However, in the case of debt forgiven on a mortgage, the IRS has made a special exception.

The following scenarios are not taxable income:

  • Primary residence- you have lived in the home as a primary residence- this means most homeowners are not liable for the debt forgiven in a short sale
  • Bankruptcy- debts discharged through bankruptcy are not taxable income
  • Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets
  • Certain farm debts: If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your cancelled debt is generally not considered taxable income
  • Non-recourse loans: A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income. However, it may result in other tax consequences

In conclusion: most short sale sellers are not responsible for the tax liability created with the debt forgiven.  Most homeowners qualify as their primary residence or due to insolvency.

For more info from the IRS visit The Mortgage Forgiveness Debt Relief Act

Posted in: Arizona Short Sale FAQ's

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