What Is The Formula To Back Out Sales Tax Foreclosure and Short Sale – What Are the Consequences You Should Be Aware of on Your Tax Return?

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Foreclosure and Short Sale – What Are the Consequences You Should Be Aware of on Your Tax Return?

The housing market hit hard in 2009 and the USA saw a rapid increase in foreclosures which led to many lenders being put on the street. Attempts were made to stabilize the government which failed. Their focus was to provide financing to mortgage brokers and not to home owners. In most cases, taxpayers will be given a tax form, known as a 1099-C if they have to go through the process of a short sale or actual liquidation. Because of these circumstances, the financial mortgage lender is responsible for providing these 1099-C tax forms and subsequently will not follow the lack of judgment. This was said to be good news. In this way, the amount of debt that has been paid off is shown as income. Keep in mind that there are always exceptions to the rule.

Below are some of the exceptions to the rules you will find.

Except for A If you foreclosed on your home, box #2 on your 1099-C will have this amount listed as forgiven debt. Under normal circumstances, during a short sale of your home conducted by local authorities, a mortgage lender will buy your home from you and it will be what is known as an REO, also known as Real Estate. The lender’s primary goal is to resell the home as quickly as possible, but in some cases this can take literally months to complete. There is light at the end of the tunnel though, the amount of debt written off will be the Fair Market Value of the home, which you can find in box #7 of your 1099-C tax form. This is an important issue as the difference between the loan amount and the Fair Market Value is the amount you should be concerned about and this amount will be shown in box # 2. Keep in mind that this is your primary residence. , the Trust Debt Relief Act 2007, states that the amount of the debt written off is not counted as income to you.

Except for B – If you have a short sale in your house, this means that your house was sold with your good financial lender at a reduced price. In the short sale you will receive a 1099-C tax form. When calculating your written off debt, they will use the actual purchase price of your home. Keep in mind that if this is your primary residence, the Foreclosure Debt Relief Act of 2007 states that the amount of debt written off is not considered income to you and a 982 tax form must be prepared.

Except for C – If your written off debt is a rental property or other type of business debt, the property loss will be recorded as a sale. In this case, you will be asked to calculate the loss or gain. To make sure that this is done correctly, it is recommended that you hire an experienced professional to help you deal with debt cancellation.

Except for D – Proceeds from the liquidation of the debt will be excluded from the bankrupt consumer to the extent that the debt will exceed the Fair Market Value of all assets. In other words, if you have a debt to asset ratio due to debt, you must choose to leave a certain amount of your income. EXAMPLE: If you have a written off debt in the amount of $100,000.00, and you have 180,000.00 liabilities and 150,000.00 assets, you can discharge $30,000.00. This will leave you with a statement of $70,000.00 instead of $100,000.00.

Except for E – This is very important! In some cases, if you are married and both of your names are on the property deed, you may receive two 1099-C tax forms and be able to write off the full amount of the debt. This is in lieu of a single form made for both parties to the agreement. This will be an important conversation to have with your tax professional. You never want box #2 money to be reported twice on the form.

Apart from F – Income from the liquidation of the debt will be completely excluded from the bankruptcy discharge.

The information above can help you understand the ins and outs of short sales and foreclosures and the impact they have on your taxes. Knowing the outcome ahead of time helps you be more neutral down the line.

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