Real Estate Information Archive

QUESTION:  (Brett)  On a short sale, (where a bank is not fully paid) is the forgiven debt taxable income?

ANSWER:  (John)  Technically yes, but most people get an exception and do not have to pay tax on the forgiven debt.   I forwarded this question to my accountant for a more complete and accurate answer.  

John,

 Generally, if a taxpayer owes a debt that is canceled or forgiven, the canceled amount is taxable income.  There are exceptions:

Bankruptcy – Canceled debt is not included in gross income if the debt is canceled in a bankruptcy case under the U.S. Bankruptcy Code.  The debtor must be under the jurisdiction of the court, and the cancelation of debt must be granted by the court or occur as a result of a plan approved by the court.

Insolvency – Canceled debt is excluded from gross income up to the amount by which the taxpayer’s liabilities exceed the fair market value of assets.  This determination is made immediately before the cancelation of debt.

A foreclosure or a short sale results in canceled or forgiven debt.  These are treated as a sale or exchange of property.  If this is a primary residence, then the normal rules for exempting the income from taxation come into play.

The bankruptcy and insolvency exceptions apply to income resulting from foreclosure or sale of property.

Have any of your clients contact me regarding their personal situation. I’d be happy to help.

Gary

This tip is brought to you by Teressa, John’s Closing Coordinator and Marketing Director.  I wanted to let you know that I have worked in the real estate business since 1996.  I have done everything from working the front desk of a real estate office, sell real estate and I have worked for 3 different real estate agents.  In all the 13 years I have never seen anyone as good with negotiations as John.  We had a little problem earlier today and I want you to know I wouldn’t want to be on the other side of John!  He uses that soft, teddy bear, good guy image to his clients benefit.  But, let me tell you, here in the office we all know what he really is…a giant, granite alligator. 

Here is a secret that not everyone knows…when I worked for other real estate agents I referred my friends & my husband’s co-workers to John.  I think that says a lot in regards to my confidence in his abilities, his integrity, his morals and his vast experience in Real Estate.  What a blessing when it finally worked out that I could be a part of this team.

Recently, John was talking to someone needing a rental.  Turns out that he is filing bankruptcy because of the present economy.  John asked what he was doing with the house he owned.  He was going to give it back to the bank…that is a foreclosure.  John told him that he could do a short sale and though his credit would still be dinged with the bankruptcy he could rebuild his credit in about 2 years.  A foreclosure follows you for 10 years.  John is now helping him avoid foreclosure by doing a short sale.

What is the tip in this you say?  If you need to buy, sell, renegotiate your loan, want advice on short sales or pre foreclosures don’t hesitate one minute to call John.  He will work for YOU!

I just received the brand new CDPE designation (certified distressed property expert).  A distressed property refers to the condition of the property or the financial condition of the owner.  Did you know that 9.1% of all mortgages are technically in default, that is 30 or more days late on a payment?  Did you know there are multiple options for stressed homeowners…such as mortgage renegotiation, recasting the loan, forbearance, short sale, etc?  I will consult with you or your friends about their options at no charge.  I have helped people avoid foreclosure by renegotiating their loans, getting refinancing and other times I have sold properties and gotten the mortgage company to forgive the deficit.  There are options!

Please forward this to your friends…even your out of state friends.  There are options for people in financial distress.  All they have to do is find a qualified expert.  I will even help them do that in their area of the country.   

Check out my website for a Foreclosure vs. Short Sale Homeowner Consequences comparison.  www.johnjacobus.com ,click on links, scroll down and click on Foreclosure vs. Short Sale