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Stephen G.
Stephen G., Sr Income Tax Expert
Category: Tax
Satisfied Customers: 4020
Experience:  Extensive Experience with Tax, Financial & Estate Issues
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How do I know if I will be taxed on the short sale of my house

Customer Question

How do I know if I will be taxed on the short sale of my house? My accountant told me a while ago that because it is our original loan (we have two loans, a home mortgage and a home equity) we would NOT have to pay taxes on the difference. We put the house on the market and now have an offer for $150k difference. Now he is saying that he can't guarantee we won't be taxed and I should consult an atty. My realtor who wants to close the sale says I won't be taxed b/c both loans were used to buy the house. Wells Fargo (who we have both loans with) says we will be taxed b/c under California law they have to forgive the debt and I will be required to file a 1099C. Please help. We're suppose to sign papers now and don't want to lose the offer, but can't afford $50k in taxes either.
Submitted: 3 years ago.
Category: Tax
Expert:  Stephen G. replied 3 years ago.

Stephen E. Grizey :

Hi & thanks for using our service. I'll do my best to give you a complete & accurate answer. Please ask me to clarify anything you don't understand.

Stephen E. Grizey :

The bank has to issue the 1099-C, not you, nor do you have to file it.

Stephen E. Grizey :

You should not have to pay any tax on the "phantom" income, so put away the tums.

Stephen E. Grizey :

Hang on a minute & I'll get you the IRC reference that explains why; this was your principal residence; I don't know what's wrong with the bank; they should either get it right or shut up before someone has a heart attack over this;

Stephen E. Grizey :

Here's the reference to the law that makes the exception for principal residences:

Stephen E. Grizey :

However, the Mortgage Forgiveness Debt Relief Act of 2007 (H.R. 3648) changed this for certain loans partially or wholly forgiven during 2007 through 2012. The law provides tax relief if your deficiency stems from the sale of your primary residence (the home that you live in). Here are the rules:




  • Loans for your primary residence. If the loan was secured by your primary residence and was used to buy or improve that house, you may generally exclude up to $2 million in forgiven debt. This means you don't have to pay tax on the deficiency.


  • Loans on other real estate. If you default on a mortgage that's secured by property that isn't your primary residence (for example, a loan on your vacation home), you'll owe tax on any deficiency.

  • Loans secured by but not used to improve primary residence. If you take out a loan, secured by your primary residence, but use it to take a vacation or send your child to college, you will owe tax on any deficiency.


If you don't qualify for an exception under the Mortgage Forgiveness Debt Relief Act, you might still qualify for tax relief. If you can prove you were legally insolvent, you won't be liable for paying tax on the deficiency


 

Customer :

Thank you so much!

Stephen E. Grizey :

Please remember to "Accept", it is the only way we get credit for our work. Feedback, if you have time, and bonuses, where you think they are warranted, are always most appreciated.

Stephen E. Grizey :

If you want, you can ask for me if you have any more questions down the road;

Customer :

Would you recommend that I hire a tax atty to ensure there won't be any surprises? Or can I move forward with confidence. Appreciate your advice.

Stephen E. Grizey :

What do you want the tax attorney for?

Customer :

The rep who is preparing the short sale docs to submit to Wells Fargo "strongly recommended" consulting one to understand any tax implications.

Stephen E. Grizey :

There are hundreds of thousands of people in the same boat as you. It has become, no big deal. You just need to fill out form 982 & file it with your tax return for the year that the 1099-C is issued. For the personal residence exception, it is like 2 lines to fill out. Your accountant can do it, I'm sure; you have enough information right here to make sure it is done correctly. I don't what a tax attorney is going to do for you except take your money. If that's what you want you can leave it here. :} I would make sure you are represented by your own attorney at the closing; not just the bank's attorney; that shouldn't cost very much; you need a deed prepared or however they do it in CA or wherever you are................

Stephen E. Grizey :

Rep? whose rep?

Stephen E. Grizey :

Representative of ?

Stephen E. Grizey :

Escrow agent or someone in that capacity?

Customer :

She is with a title company and is collecting and preparing the documents to send to the bank. She's with a title company. We are not being charged for her services. Is this not customary?

Stephen E. Grizey :

Probably is. Where do you live?

Customer :

San Francisco

Stephen E. Grizey :

Ah CA........year you use title companies there; I guess I'd be more comfortable if I had a real estate attorney with me to check out any documents before I signed them;

Customer :

I will sleep much better tonight. Thanks so much!

Stephen E. Grizey :

U R Very welcome............sweet dreams

Stephen G., Sr Income Tax Expert
Category: Tax
Satisfied Customers: 4020
Experience: Extensive Experience with Tax, Financial & Estate Issues
Stephen G. and 6 other Tax Specialists are ready to help you

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