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How Will a Short Sale Affect My Income Taxes?
How will a short sale affect my income tax? Well, there’s any number of questions that have to be answered before I can give you an answer to that question. The first question is: Is this your primary residence? If it’s your primary residence, there’s federal legislation involved that may excuse you from having to pay any taxes on the sale of your home. If you have the original mortgage and you’re short selling, then the lender will not send you what they call a “1099-C”, which is a report to the Internal Revenue Service that you’ve experienced gain from the sale of your house and therefore, you may be obligated to pay income tax on the long-term capital gains.
If you do receive a 1099 for the sale of your residence, then you may not have to pay taxes. You have to file a tax return and show the sale. However, if you’ve lived in your home two out of the past five years and own the home during that period of time, then you could exempt up to $250,000.00 of gain and that usually eliminates the problem.
Now, let’s say that this is not your primary residence and this is investment property. Well, then if you have a short sale and the lender sends a 1099 to you, then you will have to pay long-term capital gains. You may also have to recapture the deductions for your depreciation that you’ve taken on your rental property. So the best thing to hope for on all these situations if it’s not your primary residence is they don’t send you a 1099 and you take that up with your accountant on how you should report the transaction.
Also, another problem that I’ve been seeing some of my clients experience is a 1099-A and that says the property’s been abandoned and I’m really not sure just how the accountants are treating it because your debt may not be forgiven and they still send this 1099-A to you.
So if you have any more questions about it, give me a call. I’d be glad to talk to you about it. My phone number is (727) 847-2288. Thank you.