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Old 12-22-2017, 11:35 AM
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Short sale in CT and bankruptcy

I sold my home as a short sale in 2017. I am filing for bankruptcy which will be complete in 2018. Will I owe taxes on the difference between the short sale price and the original price I paid on the home? Does it matter that the short sale and the bankruptcy will be on 2 different years? Thanks.



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Old 12-23-2017, 10:07 PM
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I sold my home as a short sale in 2017. I am filing for bankruptcy which will be complete in 2018. Will I owe taxes on the difference between the short sale price and the original price I paid on the home?==>it depends; aslongas you are a homeowner facing foreclosure, a short sale might sound like the perfect solution to avoid foreclosure. However, if you complete a short sale, you could be subject to an income tax hit; as you said, even if the short sale results in a deficiency, but the lender decides not to come after you for payment and forgives the debt, this means you are no longer under an obligation to repay the lender. The lender is then usually required to report the amount of the cancelled debt to you and the IRS on a Form 1099-C. If this occurs, you may have to include the forgiven amount as income for tax purposes.let?s say you complete a short sale by selling your property for $200k, but you owe the lender $250k. The deficiency is $50k. If the lender decides not to try to obtain a deficiency judgment and issues a 1099-C instead, then you have received a cancellation of debt in the amount of $50k. This is generally considered taxable income to you. You might be able to escape tax liabilty for a short sale deficiency if you can meet the requirements under the Mortgage Forgiveness Debt Relief Act of 2007. This Act allows taxpayers to exclude certain types of forgiven debt from their taxable income, as long as the forgiven debt was used to buy, build, or substantially improve a principal residence, or to refinance debt incurred for those purposes.
This exclusion only applies to debt that was forgiven in 2007 through 2016, though it?s possible that Congress will extend it. They have done so four times now. There are some other situations when cancelled debt is not taxable, including debts discharged through bankruptcy are not considered taxable income. If you are ?insolvent? (meaning your total debts are more than the fair market value of your total assets) at the time that the debt is cancelled, the forgiven debt may not be taxable.




Does it matter that the short sale and the bankruptcy will be on 2 different years?==========> As said , a tax debt is considered ?forgiven? once it is cancelled. When this happens, the debtor must include the forgiven debt amount in their gross income for tax purposes. When a forgiven amount exceeds more than $600, the lender should provide the debtor Form 1099-C;
Another way for debtors to handle forgiven debts in bankruptcy is to ensure that tax attributes are properly allocated by filing the IRS Form 982 for the given tax year of 2018 when the bankruptcy discharged was received by the debtor.



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