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A Short Sale Might Be Considered Income

Posted by Susanna Haynie on December 3, 2012
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tax on a short saleIf you consider selling your home for less than what is owed on the mortgage, then you have probably had the ‘joy’ of experiencing a short sale, unless you had enough money to bring to the table at closing. (YES, this happens too.)

In the case of a short sale, there is a part of the short sale that will remain unpaid. The bank ‘eats’ it and reports this forgiven amount to the IRS on forms 1099-A or 1099-C. These are income statements and must be reported as income on the tax return.  This is a bit scary, to have this amount on your tax return as INCOME, isn’t it? Fortunately, there are provisions that allow you to exclude this ‘income’ from your taxes (talk to your tax professional). One of those provisions is the “Mortgage Debt Forgiveness Act” that is commonly used to eliminate income tax on those 1099s. Here are some facts about the MDF Act:

  • The short sale mortgage must be on your primary home.
  • It does not cover all mortgages:  If you have taken cash out of the property for anything other than major home improvements, you are out of luck.
  • Time is running out, this act expires the end of this year.
Disclosure:  I am not a tax professional. Do not consider this or any other of my blog posts legal or tax advice.

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