Why Do I Pay Taxes On Short Sale?
I was told today that if I do a short sale and the difference between what the house is worth and what it is agreed to sell at, I pay income taxes on the difference. Why? How does that work?
I.E. Home appraises at 163K...short sell for 120K. I pay income on the difference in price.
I think that you are wondering about the income tax liability on forgiven debt.
The IRS views forgiven debt as taxable income... however, sometimes that "income" is exempt from tax.
The taxable event occurs when the lender forgives the debt (difference bewteen what you owe, and the amount you actually pay the mortgagee from proceeds of sale.
For example, if you owe $100K but the house sells for only $80K and you pay the lender $75K... they would have to forgive $25K in debt. They report that debt to the IRS via a form 1099. You must pay tax on the $25K... or, be able to prove that that "income" is totally or substantially exempt from tax.
"shortsalepro", does this apply to the investor or the homeowner?? Please clarify.
[addsig]
In a short sale, it's the homeowner's debt that is forgiven.... it is the homeowner who incurs the liability.
This to me appears to be the biggest hurdle in why a homeowner would agree to a short. Is there a way to get them the money that will be needed to pay this tax liability? How do you overcome this negative aspect?
In the majority of ss situations, the "income" resulting from forgiven debt is exempt form tax... but each situation must be examined individually.
It matters not what the house appraises for... the tax liability arises from the difference form what is owed on the mortgage(s) and what is paid to the mortgagee.
If you owe $200,000 but can only sell the house for $190,000... that $10,000 in debt forgiveness may or may not be subject to tax.