Cash Flow Planning for Life - Helping you reach your personal & professional financial goals.

Cash Flow Planning for Life

Helping you reach your personal & professional financial goals.

#1 – How the IRS Treats Short Sales

Posted by Mark On February 24th

How the Internal Revenue Service Treats Short Sales

This is the first tip in our series 7 Things You Should Know About the Tax Consequences of Debt Forgiveness which is also available as a free eBook from your Fort Myers Accounting Firm.

With all of the foreclosures and short sales occurring all over the United States in recent years have you ever wondered how the I.R.S will treat your short sale when it comes to filing your income tax? If this thought has occurred to you, you’re certainly not alone. Please read on…

First and foremost, you should know about the Internal Revenue Code. According to Wikipedia, the Internal Revenue Code (IRC) is the main body of domestic statutory tax law of the United States organized topically, including laws covering the income tax, payroll taxes, gift taxes, estate taxes, and statutory excise taxes. Its implementing agency is the Internal Revenue Service (I.R.S).

IRC Section 108(a) generally states that any debt forgiveness, in whole or in part, by a creditor is interpreted as gross income to the taxpayer. This is the case unless an exception applies. “Insolvency” is one mandatory exception for taxpayers provided by IRC section 108(a).

So here’s an example of how this deals with short sales.7 Things You Should Know About the Tax Consequences of Debt Forgiveness

Let’s say that in 2004 a taxpayer refinances their principle residence and pays off $50,000 of credit card debt and an auto loan. That transaction looked good at the time as the taxpayer converted the interest paid on the credit cards and auto loan into tax-deductible interest. However, in 2009 the taxpayer is unable to make mortgage payments on the 2004 refinanced loan. They then are forced to sell the residence for less than is owed (a “short sale”), and the lender forgives $100,000 of mortgage debt.

Most taxpayers are unaware that $50,000 of the debt that was forgiven will be subject to tax (assuming the taxpayer is not insolvent) due to the debt’s origin.

If you have further questions about short sales and how they can affect your income taxes, please contact us online, call (239) 384-9688, or download our FREE eBook 7 Things You Should Know About the Tax Consequences of Debt Forgiveness. When it’s time for us to meet, here is a good way for you to prepare before meeting with your tax planner.

-Mark

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This information is based on facts, assumptions and representations as stated and authorities that are subject to change. We will not update this information for subsequent legislative or administrative changes of future judicial interpretations.
LEGAL NOTICE AND DISCLAIMER: The information within this eBook is for informational and educational purposes only and is not tax advice and should not be used as such. The facts of each individual situation can have significantly different outcomes when applying tax law. The hiring of a CPA is an important decision not to be based solely on advertisements.

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