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For months now, the issue of whether
or not the Mortgage Forgiveness Debt Relief Act will be extended has been on
the minds of countless homeowners facing short sales as well as myriad industry
professionals waiting and wondering.
Today, on the eve of the New Year –
there is still no official word on the extension of this program. And while our
government works at solving the Fiscal Cliff situation that looms in the air,
we can only wait and watch then hope for the best. In the interim, however,
it’s important to note that there are several misconceptions about the impact
on this latest development, as clarified by Dan Parr, CPA.
Sellers Can Avoid Taxation on Their Short Sale in Three
Ways
A common misconception centers on
debt cancellation taxation in that most people neglect to realize there are
three ways a seller can avoid taxes.
1. Primary Residence Exclusion
2. Bankruptcy Exclusion
3. Insolvency Exclusion
In case of primary residence
exclusion, the seller owns and occupies the home and the debt cancellation is
not taxable as per the Mortgage Forgiveness Relief Act. This is the area of debt exclusion that will be impacted by the new
changes taking place.
Bankruptcy and insolvency exclusions
result in no tax liability for dischargeable debt, regardless of the Act not
being extended. With respect to insolvency, a scenario affecting many Americans
doing short sales these days, as long as the seller’s net worth is less than
the loss amount, the seller is considered “insolvent” at the time of sale and
qualifies for the tax liability exclusion. This
applies to both investment and primary residence homes.
Foreclosures and Short Sales Incur Tax Liability
A common misconception about debt
cancellation and the corresponding tax liability is that foreclosures and short
sales do not apply. In actuality, the same rules apply and the owner would have
to qualify for one of the three tax exclusions as mentioned above.
Taxes Will Be Incurred Regardless of 1099 Receipt
Most homeowners think that if they do
not receive a 1099 that represents the transaction, they are not then required
to claim the debt cancellation on their tax filing. This is incorrect. The
truth is that while a lender may or may not send out a 1099 income statement,
it is very important that the seller report the taxable event for the year that
the debt cancellation occurred.
~
Keep in mind that in all likelihood,
the Act will be extended – of course it’s only our speculation at this point
but this has been a program in action since 2007 and though we are seeing an
improvement in the housing market overall, there is still much room for a full
blown recovery. Perhaps in another two or three months we can expect an
extension that would take into account the previous months of the year.
If you have any questions about this,
or other real estate related matters – I invite you to contact us today! We
look forward to helping!
For any additional tax questions,
please contact:
Daniel Parr, CPA
Parr Accounting Group, Inc.
855 SW Yates Ave, Suite 101
Bend, OR 97702
dan@parraccounting.com
