2 Year Ownership Exclusion Question Regarding Short Sales
I saw this question posted on another board and didn't see any response to it. I'm still curious about the answer.
A homeowner lives in their house for over two years and then sells their house for a capital gain of 60K. The homeowner does not have to pay taxes on the captial gain of 60K.
However, does the 2 year home ownership rule affect a short sale? If a homeowner lives in their house for over two years and goes thru a short sale of their house and the bank loses 60k - can the 60k be considered a capital gain under the 2 year exclusion rule or is it only considered ordinary income? I also understand that this is dependent on how the bank wants to report it.
The answer is probably that it has to be reported as ordinary income but it's worth asking.
That's a tricky one. One could sell his/her principal residence via a mortgagee approved short sale (less than the mortgage amount), and still have a capital gain (if sale price is greater than the original purchase price, plus capital improvement) AND incur a liability to pay tax on the forgiven income.
Apples and oranges. Capital Gains vs. Ordinary Income.