One of the most confusing topics when it comes to short sales is tax ramifications. There is so much misinformation and so many myths floating around out there as well as many people that think they know what they’re talking about when they really don’t. First of all, if you’re considering a short sale or a foreclosure one of the things to be aware of is that in both of these situations the lender will issue you a 1099 for their loss and the cancellation of your debt. Within the tax code there are a number of different things that you can read about on your own or ask your CPA about; because I’m a real estate agent and not a CPA I can’t tell you exactly what applies to you but I can make you aware that these things exist.

Number one, there’s an insolvency provision within the tax code that applies to about 85% of the people we help. It isn’t necessarily that you’re flat broke, but that at the time of the cancellation of debt your liabilities outweigh your assets. There is also a provision in the tax code that may or may not be treated as gain on sale depending on whether your home was a primary residence or not. One of the things that we offer to our clients is an attorney in the local area that is incredibly familiar with the tax code and how it relates to short sales. They can help you determine what your tax liability is, if any. Between the two different provisions that I just mentioned, I’d say that 95% of our short sale clients have no tax ramifications what so ever.

One of the things that I really want to get across to you is that when someone makes a blanket statement about owing taxes when your complete a short sale, it’s a really good indication that the person doesn’t really know what they’re talking about. Determining the tax ramifications is actually much more complicated; it’s a question of understanding your financial scenario. If you have more questions about this subject or anything else related to short sales please don’t hesitate to pick up the phone and give us a call.