When you Go through a short sale are there any benifits from that when you do your taxes at the end of the year? can you claim the loss?
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No tax benefits. You can’t claim a loss on your personal residence. You might actually owe tax on the amount of debt forgiven.
Was the balance of the mortgage forgiven by the bank? Then you do not have a loss, the bank holding the mortgage has the loss. The bank will deduct the bad debt and send you a 1099C Cancellation of Debt.
The amount of the cancelled debt is entered on Line 21 of your tax return as other income. If you were bankrupt or insolvent at the time the debt was cancelled, you may be able to reduce or eliminate the tax owed on the cancellation of debt. See a tax professional for advice on how to do this.
No benefits there! In fact, the loss suffered by the lender may be TAXABLE INCOME to you! It’s likely that you will receive a Form 1099-C at the end of the year for the shortfall from the sale. If so, that is considered taxable income to you and you must pay income tax on it.
You can avoid the tax bite IF you were insolvent at the time of the cancellation of the debt. You are considered insolvent it your debts exceed the value of your assets. Attach Form 982 to your return along with a statement of your assets and liabilities at the time of the short sale showing that you are insolvent at that moment in time and you won’t have to pay any tax on the forgiven debt.
If you lose money on the sale itself, you cannot claim that loss. The loss on the sale of a personal residence is NEVER deductible on your taxes.
The worst possible scenario on a short sale is showing a taxable gain on the sale and a large canceled debt on the back end. This could happen if you re-mortgaged a property that was free and clear and then wound up having to do a short sale. If the property showed more gain than is excludable from tax or was a vacation home that was not excludable at all you could really be deep in the pooper at tax time.
No, tax benefits. But possibly a decent sized tax bill. As another poster mentioned, you will probably receive a 1099 for the amount that is forgiven by the lender and you may have tax due on that amount. If you are insolvent or bankrupt at the time then the IRS may exclude it from taxation. However, I believe you need to be insolvent at the time the short sale occurs.
It is section 108 of the IRS code and IRS Form 982 that you will need to check out as they are related to debt forgiveness.
Remember also that a foreclosure will put you in essentially the same tax situation. But, a foreclosure is more detrimental to your credit.
A short sale will show on your credit report, as well as any payments you missed, unless you can negotiate with your lender not to report it. Even if they do report it, it will probably cost you a 100 points on your credit score whereas a foreclosure will cost you 200-280 points. The foreclosure will also stay on your credit report far longer than a short sale.
So, while a short sale has no real tax advantages over a foreclosure it does have enough other advantages to make it worth pursuing.
Good Luck!