Now that some of our family members and friends know what we are going through and what we have done, they seem to open up a little more about their finances. Some of them have me stressed for their financial decisions! Sometimes I just say to myself-it is their lives: STAY OUT! I only give the advice that I can from what I know but that is it. I realize sometimes that some people need to learn the hard way. I did.
Anyway, one question that keeps coming up is the whole tax thing when you sell your house through a short sale or settle debt. Everyone has fear of owing the IRS-me too! I know I did not do debt settlement but I did short sell my house so I really researched this topic. I wanted to go over it and post what I know.
Most of us that are filing for bankruptcy, settling our debt, going through a foreclosure or short sale probably have financial problems and can prove that we are insolvent. If you receive a 1099-c for any canceled debt-don’t fear. Yes, canceled debt is considered income that is taxable BUT there are always certain conditions. Most of us fall under the “certain conditions” category.
You will need to prove that you are insolvent. Basically what insolvency means is your debts exceed your assets. If you have a million dollars sacked away in a bank account and are trying to get out of paying taxes-then that is a different story and for that I don’t have any answers. But again, I don’t think that is the case. I highly doubt if you are short selling your home, going through a foreclosure or filing for bankruptcy that proving insolvency would be a problem. So again, don’t fear. The form you want to look for is the IRS Form 982. Google it, look it up, talk to an accountant or someone who knows taxes but don’t freak out about it.
Another thing that may help you if you have gone through foreclosure or sold your home through a short sale is The Mortgage Forgiveness Debt Relief Act of 2007 (I put a link up here so you can look it up). Of course there are some exclusions there but it is pretty cut and dry. Again, look it up and you will find all kinds of information on it.
I hope I gave anyone looking for an answer a little bit of help.
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Tags: Bankruptcy, Debt, Debt relief, Foreclosure, Insolvency, Mortgage Forgiveness Debt Relief Act of 2007
Man you talk about so many topics I can relate to. I short sold my house also. My accountant called me and said I “could be liable for the difference”. Blah Blah Blah. I told him I didn’t have any money and that I would be fine. What are they going to come after me for and possibly… get?
Michelle-don’t go into panic mode about it just yet. You may not owe taxes if you can prove insolvency. It sounds a lot harder that what it is. It’s just a form you fill out when you do your taxes.
Even our BK judge brought short sale tax consequences up at our bankruptcy hearing. Luckily, we read up about all of this stuff ahead of time. Otherwise, we would have flipped out right then and there.
Nobody wants to owe the IRS. I cringe whenever I get a simple letter from them about something totally unrelated.
Most people you would think are hip to the foreclosure/short sale tax loopholes are not. It’s complicated. I know I put the Wiki link up earlier but here is the link to the IRS website where they discuss this issue.
Since working with numbers is what your accountant does best, you may want to make it easier for him/her and send a copy of the Mortgage Forgiveness Act over to them. And ask, “Hey, does this apply to me?”
I am glad you can relate to so many topics that I write about. That was one of the main reasons I started this blog.
I mean, let’s face it—who do you know talks openly and honestly about their money issues or tax issues? Not many people I know, even though I know they have them.
I know years ago when I was looking for information on short sales, there wasn’t much out there. I stumbled upon a blog where this guy was writing details about his short sale and writing about his debt and I just went “Whoa! This guy is going through pretty much what I am going through!”
So next thing you know, I got my own blog and I am doing the same thing.
I really hope everything works out with your taxes and you do not owe anything. Good luck!