Sunday, February 27, 2011

Open House TODAY 1-4pm!

Tina Jan (@tinajan)
2/27/11 12:31 PM
Open House $211,900 1553 Mountain View, Beaumont, CA 92223. http://tinyurl.com/4v3kjcr 1pm to 4pm 4bd 3ba. I brought my knitting too! :)

If you would like see the activity of the homes in the area visit this link - http://tinyurl.com/6jxn6q4




Tina Jan
DRE# 01505855
Coldwell Banker Kivett Teeters
1655 E 6th St., Beaumont, CA 92223
(909) 446-2666 cell
(951) 880-0819 fax

Wednesday, February 09, 2011

Tax Consequences of a Short Sale vs. Foreclosure - Michael C. Gray, CPA

Tax Consequences of a "Short Sale" of Real Estate vs. Foreclosure

January 31, 2011
© 2011 by Michael C. Gray, CPA

Our nation is now seeing the effects of tightening mortgage credit after a liberal period. With increases in interest rates for adjustable rate mortgages and the conversion to amortization of principal for interest-only (or negative amortization) loans, home values for homes favored by subprime borrowers (and even other homes) are collapsing, and the debtors are either trying to "walk away" from their homes and allowing them to be foreclosed or are making "short sales."
A "short sale" is selling the home for less than the mortgage balance and trying to get the lender to forgive the unpaid balance. This is a new use of the term, and is not the definition for this item in the Internal Revenue Code. In the tax law, a "short sale" is a sale of a borrowed item to be replaced at a future date, usually a security. The only case that I know about using the term "short sale" for this type of transaction is a 2008 decision, Stevens v. Commissioner.1 With the explosion of real estate short sales, we will undoubtedly soon see more cases with them.
A reason for debtors to consider a "short sale" instead of a foreclosure is to try to protect their credit history.

How are foreclosures (and deeds in lieu of foreclosure) taxed?

An important consideration in the results of a foreclosure (or a deed in lieu of foreclosure) is whether the debt is "recourse" or "nonrecourse." If the debt is "recourse," the debtor is personally liable for the debt. If the debt is "nonrecourse," the debt is only secured by the property, and the debtor is not personally liable for the balance.
You should consult with an attorney to determine the status of your mortgage. In California, most mortgages that are used to purchase a residence are nonrecourse, but mortgages from refinancing a previous mortgage are usually recourse.
When a nonrecourse mortgage is foreclosed, the property is treated as being sold for the balance of the mortgage.2 This is important because the gain from a foreclosure of a principal residence may be eligible for the $250,000 ($500,000 for jointly-owned marital property) exclusion.
For example, for foreclosure of a nonrecourse debt,
Nonrecourse debt$500,000
Tax basis (cost to determine tax gain or loss)  300,000
Gain$200,000
If the holding period requirements are met and the residence was a principal residence, the above gain would be tax-free.
(Note: The above example is for consistency and contrast with the results for recourse debt. Most non-recourse debt for a residence is purchase-money debt, and would not exceed the tax basis (purchase price) of the residence. When the residence was a replacement residence for a principal residence sold before May 7, 1997, the tax basis can be less than the cost of the residence. Most of the mortgages for residences acquired in that scenario have probably been refinanced and are now recourse debt.)
For recourse debt, the debt is only satisfied up to the fair market value of the property. There is a sale up to that amount. If the lender forgives the balance of the mortgage, there is cancellation of debt income, which is taxed as ordinary income.3 (Regulations § 1.61-12.) (But see tax relief enacted for certain recourse debt secured by a principal residence, below.)
For example, for foreclosure of a recourse debt,
Recourse debt$500,000
Fair market value  450,000
Cancellation of debt (ordinary income)$ 50,000
(If the cancellation of debt was for "qualified principal residence indebtedness," it will be excluded from taxable income. If the taxpayer still owns the home after the cancellation of debt, the excluded amount will be subtracted from the tax basis of the residence. See the section on "tax relief," below.)
Fair market value$450,000
Tax basis  300,000
Gain$150,000
Again, if the holding period requirements are met and the residence was a principal residence the above gain would be tax-free, but the cancellation of debt would generally be taxable as ordinary income, except for certain "qualified principal residence indebtedness." See the section on "tax relief," below.

Tax relief enacted for recourse mortgage on principal residence debt forgiveness.

Congress has passed and President Bush has approved H.R. 3648, the "Mortgage Forgiveness Debt Relief Act of 2007." The legislation is effective for discharges of indebtedness on or after January 1, 2007 and before January 1, 2010. The Federal Bailout Legislation H.R. 1424, passed on October 3, 2008, extended this relief through December 31, 2012.
Under the new law, a discharge of "qualified principal residence indebtedness" is excluded from taxable income. "Qualified principal residence indebtedness" is acquisition indebtedness secured by the principal residence of a taxpayer as defined for the deduction of residential mortgage interest, but the limit is $2,000,000 for the exclusion ($1,000,000 for the mortgage interest deduction) and $1,000,000 for married persons filing a separate return ($500,000 for the mortgage interest deduction). Also, the exclusion only applies to a mortgage secured by the principal residence of the taxpayer.
The election to exclude the income from discharge of principal residence indebtedness is made on Form 982 (Re. February 2008), Part I, lines 1.e and 2. According to IRS Publication 4681, a basis reduction amount is entered at Part II, like 10.b. only if the taxpayer still owns the residence after the debt cancellation.4 IRS Publications aren't considered legal authority and I haven't found any other authority for not making a basis adjustment when the debt cancellation happens at the same time as a foreclosure or short sale.
The exclusion does not apply if the discharge relates to providing services to the lender or any other factor not related to a decline in the value of the residence or the financial condition of the taxpayer/borrower.
According to IRS Publication 4681, if the taxpayer continues to own the home after the debt cancellation, the tax basis of the residence (cost used to determine taxable gain or loss on sale) is reduced by any amount of discharge of indebtedness excluded from taxable income, but not below zero. There is no basis adjustment if the debt cancellation happens with a foreclosure or short sale. There will be two calculations. (1) Cancellation of debt income eligible for exclusion. (2) Sale of residence to apply applicable exclusion.
The new exclusion of income for discharge of acquisition indebtedness for a principal residence takes precedence over the exclusion relating to insolvency (discussed below), unless the taxpayer elects otherwise.
For example, if the previous example for a recourse debt was eligible for the exclusion, here are the tax results:
Recourse debt$500,000
Fair market value  450,000
Cancellation of debt excluded from taxable income  50,000
Fair market value$450,000
Tax basis300,000
Gain$150,000
If the holding period requirements are met, the above gain would qualify for the exclusion ($500,000 married, joint or $250,000 single) for sale of a principal residence.
(Remember the foreclosure of a non-recourse mortgage is not a discharge of indebtedness, but a "sale" of the residence in satisfaction of the mortgage. Therefore, such a foreclosure won’t qualify for the new exclusion, but may qualify for the exclusion of gain for sale of a principal residence. Also, since the balance of acquisition indebtedness is almost always less than the tax basis (cost) of the residence, it would be highly unusual for there to be a gain from a foreclosure.)

Disqualified debt taxable first.

An "ordering rule" in the tax law says that the exclusion only applies to as much of the amount discharged as exceeds the amount of the loan which is not qualified principal residence indebtedness.5 The IRS explains how to apply the rule at Page 8 of Publication 4681.
For example, Julie Smith’s residence was foreclosed in 2008. The fair market value of her home was $200,000. The balance of her mortgage was $275,000. Julie had used $50,000 from refinancing her home to pay down her credit card debt, not for home improvements. $50,000 of the debt discharge that is not qualified residence debt would be taxable, and the remaining $25,000 that is qualified residence debt would be excluded from taxable income.
Another example, the residence of John and Mary Taxpayers was foreclosed in 2008. The fair market value of their home was $1,500,000. The balance of their mortgage, which was all acquisition indebtedness, was $2,250,000. Since the maximum qualified principal residence indebtedness is $2,000, 000, $250,000 of the debt was not qualified principal residence indebtedness. The $250,000 non-qualified debt cancellation would be taxable income, and the remaining $500,000 that is qualified indebtedness would be excluded from taxable income.
Amounts that are otherwise taxable in the above examples could qualify for exclusions under other exceptions, such as for insolvency or bankruptcy.

California extends debt cancellation tax relief for homeowners.

California has enacted relief legislation for cancellation of mortgage debt relating to the acquisition of a pricnipal residence.
Governor Schwartzenegger signed SB 401 (Wolk), the Conformity Act of 2010, on April 12, 2010, while we tax return preparers were busy finishing income tax returns and extension forms.
Effective for taxable years 2009 through 2012, the maximum qualified principal residence indebtedness eligible for relief is $400,000 for taxpayers who file as married or registered domestic partners filing a separate return and $800,000 for taxpayers who file joint returns, single persons, head of household and qualifying widow or widower (other individual taxpayers). The federal limits are $1 million for married persons filing a separate income tax return or $2 million for other individual taxpayers.
The debt relief that can be excluded from taxable income is limited to $250,000 for married or registered domestic partners filing a separate return and $500,000 for other individual taxpayers. The federal exclusion is limited to the amount of qualified principal residence indebtedness.
Note that the amount that can be excluded from taxable income for California was increased compared to the amounts that could be excluded for 2007 or 2008, which was $125,000 for married or registered domestic partners filing a separate return and $250,000 for other individual taxpayers.
Those taxpayers who now qualify for relief for 2009 and who filed their 2009 California individual income tax erturns should file amended returns, Form 540X, including an amended Schedule CA (540/540NR). When filing Form 540X, write "Mortgage Debt Relief" in red across the top of page one of Form 540X.
There is no California equivalent for Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness. use the Federal form marked "California" at the top.
Remember the tax basis of the residence is reduced for the excluded gain.

What happens with a "short sale"?

Short sales are taxed under the same rules as foreclosures.
Recourse debt cancellation is not satisfied with the surrender of the property, so any debt not satisfied with the sale proceeds would be taxable as cancellation of debt income, except for certain "qualified principal residence indebtedness." See section on "tax relief" above. (Rev. Rul. 92-99, 1992-2 CB 518. Also see Treasury Regulations Section 1.1001-2(a)(2).)
Therefore, the tax consequences would be similar to the "recourse debt" example, above. The buyer and seller might also have legal concerns about whether the lender would consent to the transaction and whether (for recourse debt) the lender would in fact forgive the debt.
For example, for a recourse debt short sale,
Net sale proceeds$450,000
Tax basis  300,000
Gain$150,000

Debt$500,000
Pay off using net sale proceeds  450,000
Cancellation of debt (ordinary income)$ 50,000
(If the cancellation of debt was for "qualified principal residence indebtedness," it will be excluded from taxable income and be subtracted from the tax basis of the residence. See the section on "tax relief," above.)
For non-recourse debt short sales when the seller and buyer require the cancellation of the debt by the lender as a condition of the sale, the debt cancellation is included in the sale proceeds, like for a foreclosure.6
Therefore, a "short sale" can be a viable alternative to a foreclosure for debtors with nonrecourse debt and who qualify for the exclusion from income of the gain from the sale of a principal residence.

What about selling expenses for a recourse mortgage?

For simplicity, I have disregarded selling expenses in the above discussion. For a short sale, selling expenses reduce the sales proceeds available to reduce the loan. For a foreclosure or deed in lieu of foreclosure, selling expenses are added to the debt. (See Jerry Myers Johnson v. Commissioner, TC Memo 1999-162, affirmed CA-4, 2001-1 USTC ¶ 50,391.) The net result should be similar, assuming the fair market value of the property equals the selling price for a short sale.
For example, for foreclosure of a recourse debt,
Recourse mortgage balance$500,000
Selling expenses    50,000
Total debt$550,000
Fair market value  450,000
Cancellation of debt (ordinary income)$100,000
(If the cancellation of debt was for "qualified principal residence indebtedness," it will be excluded from taxable income. According to IRS Publication 4681, if the cancellation of indebtedness happened relating to a short sale, no basis adjustment would be required. If the taxpayer still owned the hoome after teh debt cancellation, the exclusion amount would be subtracted from the tax basis of the residence. See the section on "tax relief," above.)
Fair market value$450,000
Tax basis-300,000
Selling expenses   -50,000
Gain$100,000

For example, for a recourse debt short sale,
Sales price$450,000
Selling expenses-50,000
Tax basis -300,000
Gain$100,000

Recourse mortgage balance$500,000
Pay off using net sale proceeds
  ($450,000 sales price - $50,000
  selling expenses)
  400,000
Cancellation of debt (ordinary income)$100,000
(Same caveat for "qualified principal residence indebtedness" as above.)

Other exceptions for cancellation of debt income.

Cancellation of debt income may not be taxable if the debtor is insolvent or has the debt discharged in bankruptcy.7 With recent changes in the federal bankruptcy laws, it is much harder for individuals to file bankruptcy than before the changes.

What if the fair market value of the home has dropped after purchase?

Example - Non-recourse foreclosure/short sale
Mortgage balance$500,000
Tax basis  700,000
Loss-$200,000
(The fair market value of the property is disregarded for a non-recourse mortgage.)
If this is a principal residence, the loss is a non-deductible personal loss.
Example – Recourse foreclosure/short sale
Mortgage balance$500,000
Fair market value  450,000
Cancellation of debt income$ 50,000
(But see the rules for exclusion for cancellation of "qualified principal residence indebtedness" in the section on "tax relief," above.)
Fair market value$450,000
Tax basis$700,000
Loss (for personal residence, non-deductible)-250,000

Senator Grassley asks IRS to help homeowners with loan forgiveness tax bills.

Senator Chuck Grassley, R-Iowa, who is the ranking minority member on the Senate Finance Committee, has sent a letter to the Treasury Department and the Internal Revenue Service asking for help for homeowners who face big tax bills because of home loan debt forgiveness on a principal residence. Grassley asked that the IRS accept offers in compromise to eliminate or reduce the taxes for these transactions.
Grassley reminded the IRS that they may compromise to promote effective tax administration where compelling public policy or equity considerations identified by the taxpayer provide a sufficient basis for compromising the liability.
(Similar requests were ignored when taxpayers suffered tax disasters relating to stock option transactions during the stock market crash of 2000 and 2001.)

Considerations for rental real estate

Owners of rental properties often have accumulated suspended passive activity losses that can be applied against the income from a debt cancellation with respect to the rental.
Losses from the sale of income-producing properties may be deductible as ordinary losses under Internal Revenue Code Section 1231. (The loss is reported on Form 4797.) The loss may offset cancellation of debt income. If the property isn’t income producing, the loss may be a capital loss, limited to capital gains plus $3,000.
Taxpayers other than C corporations may elect to exclude cancellation of “qualified real property business indebtedness” from taxable income. (Internal Revenue Code Sections 108(a)(1)(D) and 108(c).) This is mostly debt incurred to acquire, construct, reconstruct or substantially improve real property used in a trade or business. The IRS Chief counsel has said that rental real estate is considered to be used in a trade or business, provided the taxpayer didn't use the property for more than 14 days in the taxable year.8 Refinanced debt up to the qualifying amount of a previous debt also qualifies. The tax basis of depreciable real property is reduced for the excluded gain. The amount excluded is limited to the adjusted basis of depreciable real property before the discharge.
Exclusions for discharges of debt in bankruptcy in a title 11 case and up to the amount of insolvency are also available for cancellations of debt relating to investment real estate.
The tax basis of assets must be reduced for the excluded gain.
Taxpayers who have a trade or business debt cancellation during 2009 or 2010 can elect to defer reporting the income. The taxpayer can be a C corporation or another taxpayer with trade or business debt. Based on the Chief Counsel Advice cited above, it appears acquisition debt cancellations for most rental properties will qualify.9 The income is reported ratably over a five-year period. For a cancellation during 2009, the income is recognized starting the fifth taxable year following the taxable year in which the cancellation occurs. For cancellations during 2010, the income is recognized starting the fourth taxable year following the taxable year in which the cancellation occurs. If the taxpayer dies, liquidates substantially all of the taxpayer’s assets, or ceases business, the rest of the income is reported in the year of the event. Pass through entities like partnerships and S corporations make the election at the entity level, but can apply on a partner-by-partner or shareholder-by-shareholder basis. If the interest in the entity is sold or otherwise terminated, the rest of the income is reported in the year of the event.10
If all of the rental properties are disposed of in short sales or foreclosures, there will be no tax benefit from making the deferral election.
The advantage of the deferral election is no basis adjustment is required for the assets of the taxpayer. The disadvantage is the tax eventually has to be paid.
(Thanks to Richard Ogg, EA, who brought the Briarpark decision to my attention!)
P.S. For more information, watch Michael Gray's Financial Insider Weekly, interviews of attorney and CPA Scott Haislett, "California Short Sales and Foreclosures", and attorney William Mahan, "How Mortgage Modifications, Short Sales and Foreclosures Work" and "Short Sales and Foreclosures - Tax Consequences". Attorney Michael Malter of Binder & Malter, LLP also discusses short sales in Michael Gray's interview forFinancial Insider Weekly“What you should know about bankruptcy for individuals”.
There are also explanations about foreclosures and cancellation of debt in IRS Publications 523, Selling Your Home; 552, Taxable and Nontaxable Income; and 544, Sales and Other Dispositions of Assets at www.irs.gov. Also see the instructions for Form 982. The IRS also recently issued IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments.

For the latest U.S. income tax developments relating to real estate, subscribe to Michael Gray, CPA's Real Estate Tax Letter. There is no charge or obligation to subscribe to this email newsletter.

IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained on this website was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.

1 Stevens v. Commissioner, T.C. Summary Opinion 2008-61, June 3, 2008  return
2 G. Hammel, SCt, 41-1 USTC ¶ 9169  return
3 Regulations § 1.61-12 ;  return
4 IRS Publication 4681, page 7.  return
5 Internal Revenue Code § 108(h)(4)  return
6 Briarpark v. Commissioner, 5th Circuit, 99-1 US Tax Cases 99-1 ¶ 50,209, 1/6/1999; T.C. Memo 1997-298, 6/30/1997. Also see Treasury Regulations Section 1.1001-2.  ;return
7 Internal Revenue Code § 108(a)(1)(A) and 108(a)(1)(B)  return
8 CCA 200919035, February 20, 2009.  return
9 Ibid  return
10 Internal Revenue Code § 108(i). Also see Temporary Regulations Section 1.108(i).  return


-
~Tina Jan~
DRE# 01505855
Coldwell Banker Kivett-Teeters
1655 E. Sixth St.
Beaumont, CA 92223
Work: 951-845-5520 Ext. 105
Fax: 951-845-4916
Cell: 909-446-2666
Toll-Free: 1-877-TINAJAN
tina.jan@coldwellbanker.com
www.tinajan.com

Is the Loss from My Home Short Sale Taxable?


Is the Loss from My Home Short Sale Taxable?

    Capital Gains and Losses

  1. It is important to understand how the IRS taxes the sale of a home. Homes fall under the capital gains tax system. Under the capital gains tax system, the IRS charges a tax on any profits you make from the sale of a capital good. A capital good could be a stock, a mutual fund, a building, a piece of land or a home. If you held the asset for less than a year, you will pay the short-term capital gain rate, which is generally the same as your marginal income tax bracket. If you held the asset for more than a year, you will pay the long-term capital gain rate, which is much lower. If you sell at a loss, however, you can write off the losses against any capital gains, effectively canceling capital gains taxes, dollar for dollar. If you have more capital losses in a given year than capital gains, you can deduct up to $3,000 in losses against your income for the year. If you still have excess capital losses, you can carry them forward to future years, and deduct $3,000 per year against income in future years, until you have exhausted all your capital losses.
  2. Deducting the Loss on the Short Sale of Your Home

  3. If you took a capital loss on the sale of your home, you may be able to claim a capital loss. When you file your tax return, fill out a Form 1040, and attach a Schedule D, Capital Gains and Losses. You can use the capital loss on your home to offset capital gains elsewhere in your portfolio.
  4. Forgiveness of Debt

  5. When a debt is cancelled or forgiven, the amount forgiven is typically taxable as ordinary income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, taxpayers can generally exclude home mortgage debt forgiven in connection with a home mortgage restructuring or a foreclosure. If your lender forgave or wrote off any part of your loan, you may be able to qualify for this exclusion. The debt is also typically not taxed in the case of bankruptcy or insolvency, which occurs when the amount of debt forgiven is more than the sum total of all of your assets. The loan is also not taxed if it was made via a non-recourse mortgage.
  6. Rules Specific to Short Sales

  7. The taxation of short sales hinges upon whether your loan was a non-recourse loan, meaning the lender cannot pursue you personally for any debt not secured by the value of the home. If your lender forgave any part of the loan, and your loan was not a non-recourse loan, you could be liable for the cancellation of the debt. Federal lawlargely fixed this issue with the Mortgage Forgiveness Debt Relief Act of 2007, but your state could still impose state taxes on the amount forgiven.


Read more: Is the Loss from My Home Short Sale Taxable? | eHow.com http://www.ehow.com/info_7804177_loss-home-short-sale-taxable.html#ixzz1DVOGcbh9


-
~Tina Jan~
DRE# 01505855
Coldwell Banker Kivett-Teeters
1655 E. Sixth St.
Beaumont, CA 92223
Work: 951-845-5520 Ext. 105
Fax: 951-845-4916
Cell: 909-446-2666
Toll-Free: 1-877-TINAJAN
tina.jan@coldwellbanker.com
www.tinajan.com

"Taxing Consequences of Short Sales" by Bill Bischoff - The Tax Guy

THE TAX GUY by Bill Bischoff (Author Archive)

Taxing Consequences of Short Sales - click here to read original article from SmartMoney.com


Sad to say, but it’s not so unusual these days to have mortgage debt that exceeds the current value of your principal residence. While this is not a pretty picture, if you hang onto the property long enough, you have a reasonably good chance of riding out the storm with little or no harm done. On the other hand, if you have to sell now, you face what’s called a short sale — which means selling for a net sales price (after subtracting commissions and other closing costs) that’s less than the outstanding mortgage debt. What are the tax consequences? Keep reading.

Short Sale Tax Basics


This subject is a bit complicated. The easiest way to explain the deal is with some examples.

Tax Gain on Short Sale

Example 1: Say you paid $200,000 years ago for your principal residence that you could now sell for a net sales price of $300,000. Unfortunately, you also have $350,000 of first and second mortgages against the property because you took out a big home equity loan a couple years ago at the top of the market, when the home was worth $500,000. Believe it or not, you’ll have a $100,000 gain for tax purposes if you sell. Why? Because the net sales price exceeds the tax basis of the home: $300,000 sales price - $200,000 basis = $100,000 gain. (Your tax basis basically equals what you paid for the property plus the cost of any improvements made over the years minus any past depreciation write-offs if you rented the property out or used part of it for deductible business purposes.)
While it doesn’t seem very fair that you could have a $100,000 tax gain from a sale that leaves you $50,000 in the red with your mortgage lenders, that’s the way the law reads. Mortgage debts simply don’t enter into the gain-on-sale calculation. Now for the good news: You’ll probably be able to exclude the $100,000 gain for federal income tax purposes thanks to the federal home sale gain exclusion break. If so, you won’t have to report the $100,000 gain on your Form 1040. You may or may not qualify for the same favorable treatment on your state income tax return, because state rules vary.

Tax Loss on Short Sale

Of course, you can also have a short sale where the net sales price is less than your tax basis in the property.
Example 2: Say you paid $415,000 for your principal residence that you could now sell for a net sales price of $300,000. You also have $350,000 of first and second mortgages against the property. For tax purposes, you’ll have a $115,000 loss if you sell because the sales price is lower than your tax basis in the home: $300,000 sales price - $415,000 basis = $115,000 loss. Will the IRS let you claim a write-off for that loss? Nope. You can only claim a federal income tax loss on investment or business property. A loss on a personal residence is considered a nondeductible personal expense. Most states follow the same principle.

What About the Excess Debt?

In both the preceding examples, the mortgage debt exceeded the net sales price by $50,000. If the lender won’t let you off the hook for any of that excess, you’ll have to figure out a way to pay it, and you won’t get any tax break for doing so.
If you’re more fortunate, the lender will forgive some or all of the excess $50,000. To the extent debt is forgiven, you have so-called debt discharge income (DDI). The general rule is that DDI is taxable income. For the year that DDI occurs, the lender should report the amount to you (and to the IRS) on Form 1099-C (Cancellation of Debt). Happily enough, there are some taxpayer-friendly exceptions to the general rule that DDI is taxable, and they can save your bacon. Here they are in a nutshell.
* Up to $2 million of DDI from mortgage debt that was originally taken out to acquire, build, or improve the borrower’s principal residence is tax-free (you must reduce the basis of the residence by the tax-free amount). This super-favorable rule is not available for DDI from debt that was not used to acquire, build, or improve the principal residence — such as DDI from a home equity loan used for other purposes. Rats! But don’t give up hope. One of the other exceptions summarized below may work for you.
* If the borrower is in bankruptcy proceedings when the DDI occurs, the DDI is tax-free.
* If the borrower is insolvent (debts in excess of assets), the DDI is tax-free as long as the borrower is still insolvent after the DDI occurs. If the DDI causes the borrower to become solvent, part of the DDI will be taxable (to the extent it causes solvency). The rest will be tax-free.
* To the extent DDI consists of unpaid mortgage interest that was added to the loan principal and then forgiven, the forgiven interest that could have been deducted (had it been paid) is tax-free.
* If the DDI is from seller-financed mortgage debt owed to the previous owner of the property, it’s tax-free. However, the basis of the property must be reduced by the tax-free DDI amount.

The Last Word

The important thing to understand is that a real estate short sale can potentially result in a taxable gain and/or taxable DDI. Thankfully, you can probably exclude the gain from taxation under the federal home sale gain exclusion deal, and you might be able to exclude some or all of the DDI, too, under the favorable exceptions explained in this article.


Click here to read the original article from SmartMoney.com.



To read more tax-related articles from Bill Bischoff - The Tax Guy, click here!




-
~Tina Jan~
DRE# 01505855
Coldwell Banker Kivett-Teeters
1655 E. Sixth St.
Beaumont, CA 92223
Work: 951-845-5520 Ext. 105
Fax: 951-845-4916
Cell: 909-446-2666
Toll-Free: 1-877-TINAJAN
tina.jan@coldwellbanker.com
www.tinajan.com