Short Sale and Taxes

[FoolFromAZ]

One of my neighbours is going through this. I want to ask this question for him. He bought his house in 2006 for 328K. he did not put any money down. Now he wants to foreclose or shortsell this home. Now he got the approval for short sale from his lender. it is approved for 100K. the question is, if the house is sold for 100K. Will 238K (328 - 100) be considered as income and does he have to pay, say 30% of that amount to IRS when he file the tax return next year? What will happen if he let it foreclosed instead of short selling?

Appreciate the response.

[MonkeyMama]

No easy answer here - the tax ramifications of a short sale are extremely complex. I believe there was some Federal relief (not sure on details off top of head), but this does not remove state tax ramifications, etc. So it would also depend on the state, etc.

That being said, both short sales and foreclosures are treated as forgiven debt. So not sure one is preferable. Short sale may be preferred if state taxes are high for forgiven debt (because less would be forgiven). BUT I have also heard that lenders can come after you for difference in short sale, in some instances.

Not sure you'll find any good, free advice on the matter. Certainly no valid advice without knowing your state and further details.

[FoolFromAZ]

No easy answer here - the tax ramifications of a short sale are extremely complex. I believe there was some Federal relief (not sure on details off top of head), but this does not remove state tax ramifications, etc. So it would also depend on the state, etc.

That being said, both short sales and foreclosures are treated as forgiven debt. So not sure one is preferable. Short sale may be preferred if state taxes are high for forgiven debt (because less would be forgiven). BUT I have also heard that lenders can come after you for difference in short sale, in some instances.

Not sure you'll find any good, free advice on the matter. Certainly no valid advice without knowing your state and further details.

thanks for your response. the state where we live is AZ.

[maat55]

I don't know about the state ramifications, but I'm fairly sure that the government is not taxing the forgiven debt. The program was implemented last year and is surely in effect today.

Here is the IRS explination:

The Mortgage Forgiveness Debt Relief Act and Debt Cancellation