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 Homeowner Tax Home owner tax issues and rebates.

06-10-2015, 06:52 PM
 Junior Member Join Date: Jun 2015 Posts: 2
Selling House at a Loss

We built and purchased our house in 2003 for \$705,000. We took out a first mortgage and a HELOC to purchase it. We presently owe \$450,000 on the first and \$175,000 on the HELOC. It's worth \$550,000. If we sell it for its appraised value, \$550,000, we are going to have to come to the table with \$75,000. What are the tax implications of this scenario?

Thanks!

06-11-2015, 05:32 PM
 Moderator Join Date: Oct 2010 Posts: 5,258
Quote:
 Originally Posted by 6crnbnh We built and purchased our house in 2003 for \$705,000. We took out a first mortgage and a HELOC to purchase it. We presently owe \$450,000 on the first and \$175,000 on the HELOC. It's worth \$550,000. If we sell it for its appraised value, \$550,000, we are going to have to come to the table with \$75,000. What are the tax implications of this scenario? Thanks!
the formula for calculating the capital gain / loss involves subtracting your original cost basis from your selling price of the home. Your adjusted basis is generally your original cost in building/ acquiring your home plus the cost of any capital improvements you made, less casualty loss amounts and other decreases. Home basis is a term used to describe the money you spent to buy and maintain a piece of real estate like a home built / attached to that land. Although you don’t add mortgage interest to the property basis, an even greater advantage is that you may be able to write it off on your taxes aslongas you itemize deductions on Sch A of 1040, So,in your case, your original basis is \$705K and your selling price is \$550K, so your long term capital loss( I assume that you have owned it for more than one year) is \$155K;\$705K-\$550K. Losses from the sale of personal–use property, your home ,are not deductible. It is not eligible for the capital gains loss of up to \$3K annually. A s the sale of the home in which the proceeds from selling the property will fall short of the balance of debts secured by liens against the home, and if you cannot afford to repay the liens' full amounts and the lien holders may agree to release their lien on the home and accept less than the amount owed on the debt. Short sales are an option some homeowners use when the bank, credit union or other types of lenders they have borrowed from provides them with the option of selling their home to a third party (generally the lender) at a price that is much lower than what they actually still owe on the note of their home loan .

Asyou can see, aslongas you have a long term capital gain from the sale of your main home, you may qualify to exclude up to \$250K of that gain from your income. You may qualify to exclude up to \$500K of that gain if you file a joint return with your spouse; to qualify for the exclusion, you must have owned and used your home as your main home for a period aggregating at least 2years out of the 5 years prior to its date of sale. You can meet the ownership and use tests during different two year periods. However, you must meet both tests during the five year period ending on the date of the sale. Generally, you are not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home.

06-11-2015, 10:38 PM
 Junior Member Join Date: Jun 2015 Posts: 2
I've read that with a short sale the lien holder has 2 options after the sale. Option 1: Come after you for the balance which can result in wages being garnished, etc. or Option 2: Forgive the debt in which case the amount forgiven will be counted as income by the IRS and you will have to pay the tax on that "income". A short sale sounds awfully risky with a lot of downside. But I was also curious what the IRS may do when it is a loss? Am I to understand nothing and the fact that we cannot deduct the loss?

06-11-2015, 11:38 PM
 Moderator Join Date: Oct 2010 Posts: 5,258
[quote=6crnbnh;25379]QUOTE]

I've read that with a short sale the lien holder has 2 options after the sale. Option 1: Come after you for the balance which can result in wages being garnished, etc. or Option 2: Forgive the debt in which case the amount forgiven will be counted as income by the IRS and you will have to pay the tax on that "income".========>>Correct;in general you need to report it on 1040 line 21 as other income; however, when sell your home for less than what was owed to your mortgage lender/ do a short sale / foreclosure, you probably got a 1099-C from your lender .In particular, you want to make sure that any mortgage debt that was partly or entirely forgiven doesn’t wind up causing you to pay unnecessary taxes to the IRS. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude up to \$2 million( \$1 million for a married person MFS return.) of debt forgiven on your principal residence aslongas the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence. If you qualify, you may claim the special exclusion by filling out Form 982 and attach it to your federal income tax return for the tax year in which the qualified debt was forgiven. This provision applies to debt forgiven in calendar years 2007 through 2014. The Mortgage Debt Forgiveness Relief Act provides a tax exemption to owner-occupied homeowners when their mortgage company forgives debt through a short sale or foreclosure. The Act was originally passed in 2007 and was extended in 2009 through December 31st, 2012. It was then extended one final time by Congress, until Dec 31st, 2014. This means that in 2015 many homeowners will be on the hook for “short sale tax” or “foreclosure tax”. Aslongas you complete a Short Sale in 2014, you might be able to walk-away scot-free without owing a dime in mortgage forgiveness income tax, sometimes referred to as “short sale tax” or “foreclosure tax

A short sale sounds awfully risky with a lot of downside. But I was also curious what the IRS may do when it is a loss? Am I to understand nothing and the fact that we cannot deduct the loss?=======>>It is an issue between you and the lender; a short sale is a considerably timely procedure that requires the permission of your lender . Doing a short sale is hard enough, , but it's even harder when you have two loans as not only do you need the cooperation of the first lender, the second mortgage holder needs to release that loan as well..A short sale is necessary when you, as an homeowner, are facing a possible foreclosure and selling the house would not yield enough to pay back the lender in full. So, in essence, the lender must agree to "forgive" the balance of the loan that will remain unpaid even if you sold it, and allow a new buyer to take over the home with a new loan. Because banks do not want to own homes, short sales are often approved; it is, however, not an easy process and requires skill and experience.You may write a hardship letter. This is instrumental in getting the bank to even consider forgiving the amount you will owe after the sale. It must be expressed that your financial circumstances have changed, and why; it must also show that you are unable now, and will remain unable, to pay the mortgage as had originally been promised, for the foreseeable future.I guess you need to hire an experienced real estate agent who has successfully completed short sales before. In geenral, Short sale allows you to avoid foreclosure on your home. Like a foreclosure, a short sale is considered a derogatory item and it will remain on your credit.Unfortunately, there is no way to avoid the damage a short sale does to your personal credit score. A short sale can knock as much as 160 points off your credit score.

09-06-2015, 03:16 AM
 Junior Member Join Date: Sep 2015 Location: USA Posts: 2
Well losses from the selling of personal–use residence, your house are not deductible. It is not qualified for the investment benefits lack of up to \$2.5K yearly.

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