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jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3159
Experience:  I've prepared all types of taxes since 1987.
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I have a tax question. I am presently in Chapter 13 Bankruptcy

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I have a tax question. I am presently in Chapter 13 Bankruptcy and the Court has ordered us to surrender our interest in a second home. The mortgage company has proposed a short sale offer but says it may be reported to the IRS. Would I be better off tax wise to go with a short sale and risk the possibility of it being reported to IRS or allow the property to be foreclosed on? I will not receive anything from the short sale and cannot be held liable for any difference in the foreclosure loss since it is tied up in Bankruptcy Court. I just do not know which way would be best tax wise for me to go. This was a rental property if that makes a difference.



Whether the property is foreclosed or there is a short sale there will be likely be no income from discharge of indebtedness that has to be included in income.


See Questions and Answers on Home Foreclosure and Debt Cancellation

The most common situations when cancellation of debt income is not taxable involve:

  • Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.
  • Insolvency: If you are insolvent when the debt is canceled, some or all of the canceled debt may not be taxable to you.You are insolvent when your total debts are more than the fair market value of your total assets.Insolvency can be fairly complex to determine and the assistance of a tax professional is recommended if you believe you qualify for this exception.

When cancellation of debt income is excluded from income there is usually a requirement to reduce tax attributes; so the only minor difference there may be from the two courses of action is the amount of tax attributes to be reduced; but that may not even apply in your case. You will have to discuss all the facts and circumstances with a tax practitioner to be certain there is any difference or not.


Either course of action should result in there being no addition to your income.

It does not matter if is reported to the IRS or not.


I hope this helps.

Best wishes.

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