What are the IRS tax implications of a short sale and a foreclosure?

Question:

If you get $50,000 of debt relief from a short sale (lender accepts $20k on a $70k note) is there a tax implication? How is that different from just forfitting the property through foreclosure?

Please don't answer if you are just guessing - I can do that on my own ;-)

Answer:
The bank should issue a 1099 for debt relief of $50,000--and that amount can be taxable to the person who owed the debt.

If the home was a business property, there may be a loss on the home to offset part of the gain.

Additionally, if the taxpayer is bankrupt or insolvent, the debt relief may be excludable from income. In broad terms, to be insolvent, the taxpayer's liabilities must exceed their assets.

Unless the person is willing to simply include the $50,000 on his tax return, further research or hiring professional help is in order.

The person who shorted the bank gets a 1099-C Cancellation of Debt. It is taxable income, UNLESS THE recipient is insolvent. If partially insolvent, then only the part of the debt less the insolvent portion is taxable.

So if someone WALKED on a note, but had assets greater than debts (including the house and original note), then someone gets a tax surprise!

Tax Advisor

There is no difference check out this link from irs.gov
http://www.irs.gov/faqs/faq4-4.html...
it has the information and includes info concerning if you were in bankruptcy. For further information call 1-800-829-1040

What are the IRS tax implications of a short sale and a foreclosure?

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