who handles taxes on the gain of the short sale?

sucram profile photo

just wondering if you have ownership interest and do a back to back sale you own the gain and therefore the tax liability. am i right?

Comments(6)

  • DaveT6th April, 2003

    Sounds right. The person who gets the profit, pays the taxes.

    Your title mentions a short sale, but without details of the deal, a complete answer is impossible.

  • 6th April, 2003

    Quote:
    On 2003-04-01 23:27, sucram wrote:
    just wondering if you have ownership interest and do a back to back sale you own the gain and therefore the tax liability. am i right?


    DaveT is correct, you have the tax liability whether or not you have legal title to the property because under the tax law, the taxes are owed by the person that has equitable title. On the short sale you will be deemed to have equitable title even if you do the short sale in a manner whereby you do not take legal title (as happens in some short sale transactions).

    Your tax liability will likely be short-term capital gains if you are not in the business of turning short sale profits often each year. The tax rates for short term capital gains is the same as the ordinary income tax rates; i.e., up to 38.6%.

    Hope that helps,

    Taxjunkie

  • DaveT8th April, 2003

    sucram,

    In these forums, the term "short sale" means that a lender accepts less than the full balance owed on a loan as payment in full. Short sales involve cancellation of indebtedness, which may become taxable income to the seller.

    In appears that Taxjunkie assumed that you used the term short sale in the context of a quick flip, and framed his response accordingly.

    What did you really mean when you used the term "short sale"?

  • 12th April, 2003

    My understanding of Taxes in regards to "shortsales" is that the PreForeclosure rascal that signs his property to u to short will be responsible for a taxable event
    on the differance between the mortgage the rascal had, and the figure you short it for with the lender.

    Jonathan

  • DaveT12th April, 2003

    That's what I said.

    Here is how a typical short sale goes. The homeowner receives your purchase offer for a price that is less than the mortgage payoff. Because the seller does not have the cash himself to pay the difference between the mortgage payoff and your purchase price, he asks his lender to approve the "short sale" and accept less than the full mortgage balance as payment in full.

    Once the lender approves the "short sale" and insures that there is no money left on the table for the homeowner, you go to settlement and get the deed at closing.


    I admit that I have not kept up with the tax rules regarding taxation on forgiven debt. Here is my understanding of how it worked a couple of years ago, though the laws may have changed in the interim.

    If the property is the seller's primary residence, then the full mortgage amount is the "deemed" sale price for capital gains calculations. If the seller is otherwise qualified for the $250K capital gains exclusion, then his entire profit on the deal is tax free.

    If the property is investment property, then the difference between the FMV of the property on the date of sale and the mortgage balance may become taxable as forgiven debt (However, if the seller has sufficient equity in other investment property, he may be able to avoid immediation taxation by adjusting the basis of his other property).

    The difference between the FMV and the actual sale price may be taxable as a capital gain to the extent that the sale price exceeds the seller's adjusted cost basis.

    If the seller can prove insolvency, then the taxes on forgiven debt are waived.

  • 13th April, 2003

    DaveT

    Ok, you got me, I feel I'm swimming in a much larger bucket of worms here.

    LOL

    Be well

    Jonathan

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