Will I have to pay taxes after a short sale?
There may be tax ramifications to a Short Sale but every situation is unique. You may have heard, “Don’t do a short sale because you will get a 1099 and have to pay taxes on the difference between what you owed on your home and what you sold it for or the amount the bank wrote off.” This may be true, but this is not the whole story.
If you borrow money from a lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender.
When that obligation is subsequently forgiven, the amount you received as loan proceeds is normally reported as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.
The thing that most people don’t know or don’t tell you is that with a Foreclosure, you will also get a 1099. In the case of a Foreclosure the 1099 is called a “1099-A” and the ‘A’ stands for “Acquisition or Abandonment of Secured Property”. It is important to know that while there are many differences, the tax consequences for the ‘C’ and the ‘A’ are the same. Because of The Mortgage Debt Relief Act of 2007 you may not even be required to pay taxes on the ‘income’ as shown on the 1099-C. However, you should not just assume that you won’t have to pay. While we are very good at successfully closing Short Sales, we are not certified tax experts.
Before making your final decision, first consult a CPA or Tax Professional.