In the past few weeks, there has been a lot of important information for real estate agents and sellers related to short sales. The Star Tribune recently published an article regarding the State of Minnesota not extending its Mortgage Debt Tax Relief through 2013 despite an extension at the federal government level. To read the Star Tribune Article, you can click on the following link: startribune/politics/statelocal/224729582.html. The impact of the State of Minnesota not extending its Mortgage Debt Tax Relief through 2013 is significant. Any homeowner who has lost his or her property through foreclosure or sold it as a short sale during 2013 can now be taxed at the state level for any debt that was forgiven. It is anticipated that the Mortgage Debt Tax Relief issue will be brought up in during the State of Minnesota’s next legislative session, and it is possible that this issue may be corrected and the tax relief made retroactive. However, there is no guarantee that such a correction will be made. For this reason, it is important for sellers to understand some basic information related to the debt forgiveness and taxes. First, a lender will issue a 1099-C Cancellation of Debt form for any borrower who has $600 or more of debt forgiven by way of a foreclosure or short sale. Most likely, the amount of debt being forgiven will be larger for a foreclosure than a short sale. This is because the loss to the lender is usually significantly higher through foreclosure, and therefore a higher amount of debt is cancelled. For this reason, foreclosure is not a homeowner’s solution to avoid the possible state tax liability. Second, there is no tax liability if a borrower is insolvent to the extent of the mortgage debt forgiven. Thus, the possible state income tax issues are likely to have a larger impact on the “strategic” short sale sellers than those homeowners with severe financial hardship. Finally, in situations where a homeowner files bankruptcy and a discharge is granted, there is no 1099-C Cancellation of Debt form issued in connection with the foreclosure or short sale because there is no forgiven debt to tax. In other words, if the debt was previously discharged as part of a bankruptcy proceeding, it does not create a taxable event. When selling your home and you may be facing foreclosure or who is looking to do a short sale, it is imperative that you consult with a tax professional. A tax professional will be able to advise you on important issues, such as how current tax law applies to your particular circumstances and whether or not the insolvency rule applies to your financial situation.
Posted on: Mon, 30 Sep 2013 22:26:48 +0000
Trending Topics
Recently Viewed Topics
© 2015