San Diego Short Sales Tax Consequences of Doing a Short Sale

Hi, my name is Kurt Wannebo, also known as Short Sale Kurt. You may have been watching these videos if you found me through my website or perhaps you saw one of my video presentations on the news or perhaps on my television commercials on many of the local stations around here; or maybe you’ve seen me in one of the numerous speaking events that I’ve done about short sales.

In any event you found me and this is multi-part video consultation for people that I like to give to get some information out there about short sales – basically, all the things that you need to be concerned with, everything that you need to know. Now, I do a personal phone consultation to go over your case specifically in regards to your hardship and your lenders and what it is you have going on but this is more of a basic broad overview of short sales and the things that you need to consider and know about before deciding to move forward. Once you’ve watched all of these videos it’d be good for us to speak and we can go over your case individually.

This is what you need to know. Videos are going to be multi-part so I do advice you and recommend that you watch all of these videos before giving me a call so that you’re kind of well-versed and we can go over your case specifically. If not, we can still cover that in the consultation but it’s in your best interest. This is the first video I’m going to be doing which is basically talking about the tax implications of doing a short sale. There’s a couple of things you need to know about. One is the tax implications. One is the credit implications and the last is the deficiency issues on whether or not you have to pay any money back to the bank.

We’re going to talk specifically in this part about the tax implications, okay. First of all, what happens after a short sale typically is this: whatever money that the bank loses in this entire transaction typically what will happen if the bank is going to forgive you for the amount of money that you owe, they’re going to go ahead and issue you what’s called a 1099c the year that the transaction goes to sale. Now, this 1099c is a cancellation of debt for the remaining balance; that they have forgiven you.

Typically, most people receive these 1099s with a short sale but it’s important for every individual to determine are they going to be responsible for paying any taxes when they receive this 1099 because it can be a taxable event deemed by the IRS or the state of California. There are a couple of exemptions for homeowners to not have to pay any taxes, though, after a short sale. We’re going to talk about these here in a couple of seconds. The first exemption for a homeowner is what’s called the Mortgage Debt Relief Act of 2007.

Basically, that is applicable to the IRS and the federal taxes and basically stated, it says if this is your primary residence and you have not pulled any money out after the purchase of the home or refinanced or used any of that money for other ventures or other items and it’s your primary residence, typically, you will be excluded and not have to pay any taxes after a short sale or foreclosure. This provision does end at the beginning of 2013.

It goes all the way through the end of 2012 and it is kept for a total forgiveness amount of $2million. If you have pulled any money out on your property, you may still be eligible for this particular exclusion. You’re just going to have to be able to prove that all of that money you pulled out went 100% back into the property for repairs and improvements.