Short Sales in 2014
Tacking on a tax on Short Sales and Foreclosures is like adding insult to injury, but it may happen in 2014 unless Congress acts soon to extend a law enacted in 2007.
If they don’t act and we know how often that has happened lately, you could be liable to pay tax on the amount of the loss that the lender suffers on the sale of the home; unless you know what to do in order to avoid it.
The recently expired tax law enacted in 2007, allowed you sell your home as a Short Sale or have the lender foreclosed and not be required to pay taxes on the lender’s loss when you sell the property.
The expired law allows the lender to send you a 1099 for whatever money is lost on the Short Sale or Foreclosure of your home. But it did not require you to pay taxes on that loss, which is considered income to the seller. For example, if the lender loses $40,000 on the sale of your home, they could send you a 1099 and you may have to pay taxes of approximately $10,000 if you are in the 25% tax bracket.
As I said earlier, Congress is looking into an extension, but there are no assurances that they will get it done.
So what should you do now if you are facing foreclosure and need to sell your home? Contact a Real Estate agent or broker that is experienced in negotiating these types of transactions and get some help with a Short Sale.
Will they always succeed in getting the job done? Not every time, but you will stand a better chance of avoiding foreclosure and better yet, not paying tax on the aforementioned 1099. It is worth a shot.