Cleveland Ohio Business News
The Expert: Elisabeth C. Plax, president, Plax & Associates Financial Services; branch manager, LPL Financial, Beachwood. (Securities and financial planning offered through LPL Financial/member FINRA, SIPC)
Credentials: Doctorate, MBA, certified financial planner, securities and insurance licenses
Experience: 26 years in personal financial planning, wealth management and retirement/estate planning
Assets under management: $48 million
The Question: I just sold my home (after two long years on the market) but it was a short sale. Someone said the forgiven balance will count as income that I'll have to pay taxes on. Is this true? I thought some of the new laws were supposed to make it easier for consumers. If I owe taxes on this, can I spread them out over a period of years?
The Answer: New laws did make it easier for consumers. A short sale occurs when your mortgage lender agrees to allow you to sell your home at a price that is less than the balance of your mortgage. At the same time, the lender cancels or reduces the debt you owe.
Example: You bought your home for $150,000 a few years ago and still owe $120,000 on the mortgage. The home is now worth $100,000. If the lender allows you to sell the home for $100,000 and cancels the remaining $20,000 of mortgage debt, that is a short sale.
The decision to allow a short sale is clearly up to the lender. It is more complicated and requires more time than the standard sale of a home.
Typically, the lender will issue a form 1099C (cancellation of debt), and the amount canceled would be taxable as income to the borrower (seller). In the example above (not taking closing fees into account), $100,000 from the proceeds of the sale would go back to the lender. The amount of debt canceled would be $20,000.
However, current law allows short sales of a principal residence completed during 2007 through 2012 to exclude the forgiven balance from taxable income, up to $1 million for a single filer and up to $2 million for a joint return.
For more detailed information, consult IRS Publication 4681 or your tax adviser.
Questions? email scottbishop@windermere.com or online LewisBishop.com