Is the Loss from My Home Short Sale Taxable?

By Jason Van Steenwyk , eHow Contributor

updated: January 18, 2011

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.

Deducting the Loss on the Short Sale of Your Home

2. 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.

Forgiveness of Debt

3. 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.

Rules Specific to Short Sales

4. 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.

References

• IRS: Home Foreclosure and Debt Cancellation
• IRS: Publication 4681 - Canceled Debts, Foreclosures, Repossessions and Abandonments

Resources

• IRS: Mortgage Workouts, Now Tax-Free for Many Homeowners; Claim Relief on Newly-Revised IRS Form
• San Francisco Chronicle: Short Sale Tax Short-changes Ex Homeowners

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

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