Minnesota Short Sale Expert

I need to start off by saying that I am NOT an attorney and do NOT intend to offer any legal advice with this post. With that said, people ask me all the time what the effect or consequence a short sale will have on them with regard to having to pay taxes. it seems as though most that are in this position have heard that when doing a short sale in the past you were always taxed on the difference between what the bank accepted and what is owed on the property. This was indeed true…in the past.

In December of 2007 Congress passed a new bill called The Mortgage Debt Relief Act of 2007 that changed the rules as far as tax implications go when a homeowner has a debt that is cancelled. Please click on the above link to read all of the details regarding these changes but I will give you a “thumbnail” version of some of the basics that effect many that are looking to do a short sale.

If you have a primary residence that goes through a short sale that cancelled debt in most cases will fall under these new rules. You WILL receive a 1099C at the end of the year showing the amount of cancelled debt. However, when doing your taxes at the end of the year you will also need to fill out Form 982 which will be added into your return. This basically  offsets the 1099C that the lender sends you.

If the property was an investment property or second home the rules are different and often times (unless you can show that you were insolvent at the time of the cancelled debt) you WILL be responsible for the tax amount on the difference. Please keep in mind that there are many different options and scenarios with each of these cases and you should consult your tax advisor to determine how you will be affected.