This is good news for home owners who sold their homes as short sales in 2014 and are getting ready to file their 2014 income taxes. Many may already have receive a 1099C sent to them from the lenders that processed the short sale. This will show capital gains from the sale of the home, and at first glance will seem to be another financial disaster. It may not be but will require some additional research prior to filing the taxes.
Under the Mortgage Forgiveness Debt Relief Act of 2007, almost all sellers were granted a waiver of deficiency for the outstanding balance of the mortgages. This would have been detailed on the final settlement letters they would have received. Not included with that letter would have been the relief of obligation for the phantom income as well. The relief for taxes consequences would have had to come from the government itself. In December, Congress extended the forgiveness of these gains retroactive to the beginning of 2014.
The phantom income would be the difference between the value of the outstanding balance of the loan and the amount reported to the IRS at time of the closing. This would be reported as capital gains.
In December of 2014, the congress passed the extension to the act to allow distressed sellers to get the tax relief. Complete details of the relief can be found on the IRS web site. The IRS publication 4681 offers detailed examples for Canceled Debts, Foreclosures, Repossessions and Abandonments.
IRS Form 982 must be completed as required for the particular situation. As with all tax situations, each case is different and a qualified accountant should be consulted to confirm eligibility and also ensure the maximum allowance is achieved.
Short Sales can be difficult but still very much an issue here in Central Connecticut. Many Connecticut home owners are underwater with their mortgages and have legitimate hardships that may qualify them for relief with a short sale. While there is still an incentive to get this relief they should take advantage of that assuming it is in their best interests.
I am an experienced real estate professional in Connecticut, with many successfully closed short sales. If you are an underwater homeowner in Connecticut, I may also be able to help you. Contact me today!