Realty Times - IRS Says Foreclosures, Short Sales Can Be Less Taxing

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IRS Says Foreclosures, Short Sales Can Be Less Taxing

by Broderick Perkins

You may not have to pay taxes on cancelled debt in a short sale.

If you lost money on a foreclosure you can't claim the loss on your tax return.

Taxpayers who owe taxes due to a foreclosure may qualify to settle their tax debt for less than the full amount.

Some of those facts can be music to the ears of financially troubled homeowners confused about the tax burden associated with short sales, foreclosures and bankruptcies.

The latest relief effort for those facing mortgage problems comes from the U.S. Treasury Department's Internal Revenue Service (IRS).

"Questions and Answers on Home Foreclosure and Debt Cancellation" offers salient answers to burning questions related to financial disasters at home.

The information is designed to reassure homeowners that while mortgage workouts can have tax consequences, special relief provisions can often reduce or eliminate the tax bite.

For example:

Cancellation of Debt -- In a short sale, often used as an alternative to foreclosure or bankruptcy, the lender forgives a certain portion of the amount owed on a home. The amount forgiven can be considered taxable income, but not always.

Debts discharged through bankruptcy are not taxable. For those who are insolvent when the debt is cancelled, some or all of the cancelled debt may escape taxation. If you really lose the farm, certain farm-related cancelled debts are not taxable. Also not taxable is the forgiveness of debt on so-called non-recourse loans, loans for which the lender's only remedy in the case of default is to repossess the property.

Foreclosures -- In a foreclosure, if there is any cancellation of debt (other than on non-recourse loans) or a gain from the foreclosure (because a foreclosure is treated as a sale) the amounts could be taxable unless you meet one of the exemptions for cancellation of debt mentioned above.

Also, some or all of the gain from a foreclosure sale of a personal residence qualifies for exclusion from income under the U.S. Taxpayer's Relief Act of 1977.

If you have owned and used the home as your principal residence for periods totaling at least two years during the five year period ending on the date of the foreclosure, you may exclude up to $250,000 (up to $500,000 for married couples filing a joint return) from income.

The new IRS section includes a host of additional information, including worksheets to figure cancellation of debt income and gain from foreclosure as well as links to related publications, fact sheets and tax filing forms.

It behooves anyone facing these complex issues to seek professional tax help to determine how these tax rules do or do not apply.

Published: September 20, 2007

Use of this article without permission is a violation of federal copyright laws.

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Broderick Perkins parlayed a career in old-school journalism into a contemporary digital news service that really hits home.

The award-winning consumer journalist, originally from Wilmington, DE, is founder, publisher and executive editor of the bootstrap DeadlineNews Group, a Silicon Valley-based editorial content and consulting service specializing in residential real estate, consumer news and related editorial consulting services.

The DeadlineNews Group includes the website, DeadlineNews.com, offering real estate editorial content and consulting services, and its back shop, the Deadline Newsroom, an open house on news that really hits home.

Perkins obtained his formal journalism education from University of Delaware and a journalism boot camp, the Institute of Journalism Education at the University of California-Berkeley. He went on to 20 years of service as a daily newspaper journalist at the Wilmington, DE News Journal and San Jose, CA Mercury News.

Perkins covered housing on the San Jose Mercury News reporting team which earned a General News Reporting Pulitzer Prize in 1989 for coverage of the Loma Prieta earthquake.

He has also produced real estate, consumer and small business content for the Wall Street Journal, Los Angeles Times, RealtyTimes.com, Nolo.com, Better Homes and Gardens, the National Association of Realtors, Homestore/Move and Intuit/Quicken among more than three dozen publications.

In addition to managing the DeadlineNews Group, Perkins most recently served as chief editorial consultant for Nolo's Essential Guide To Buying Your First Home, Nolo, and writes real estate television scripts for RealtyTimes.com.

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