Monday, August 11, 2008

Short Sales and Taxes

People who are selling their home for less than they owe (short sales) may still have to pay taxes. Generally, a seller will get permission from the lender to have a portion of the loan written off in order to allow the seller to sell the home. That amount of money which was "written off" is then claimed on the seller's taxes as taxable income. This tax hit often stopped seller's from selling - opting instead for foreclosure.

In order to assist these people a new law was enacted which changed the above rule. This new law states that the income from the written off portion of the loan is not taxable if:

- debt was forgiven between January 1, 2007 and December 31, 2009 (this may be extended);

- it is the seller's primary residence;

- the debt forgiven isn't a refinance (this forgiven debt will be taxed); and

- is limited to 2 million dollars.

Remember, capital gains tax could still apply if you haven't lived in the property for over two years.

If you are thinking about doing a short sale you should talk to your accountant to find out about any tax ramifications. Don't leave this to chance. Don't rely on your real estate agent because tax laws are tricky.

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