“What Happens After the Debt Forgiveness Law Expires 12/31/12?”
Many folks involved in a short sale don’t have any idea of the tax consequences (Debt forgiveness), they avoided. What happens after the this law expires at year end? Will this law be extended? That is the sixty-four thousand dollar question.
Will an educated homeowner be willing to do a short sales, if there is no debt forgiveness law in place? Without a continuation of the debt forgiveness law, that is set to expire 12/31/12, the information below is what happens.
If a homeowner is considering a real estate short sale, they should be aware that they most likely will receive a form 1099-C for the amount of the lender's losses. This is considered loan forgiveness in the eyes of the IRS.
If they have other assets such as saving and they are not insolvent, they may end up being responsible to pay ordinary taxes on the amount of the 1099-C.
If they settle a debt with a creditor for less than the full amount owed, you may be required to report this forgiven debt as regular income, with certain important exceptions. The forgiven debts include money owed after foreclosure or property repossession or credit accounts that they don't pay. There are exceptions noted below.
If a lender forgives or writes off $600 or more of a debt's principal (the amount not including interest or fees) must send you and the IRS a Form 1099-C at the end of the year. When they file your tax return for the tax year in which your debt was written off, the IRS will require that you report the amount on the form as income.
While they may not have received this form from the creditor, the creditor may have submitted one to the IRS anyway. If they don’t list the income on their tax return and the IRS has the information of the transaction on file, they could get a tax bill or, worse, an audit notice. This could end up costing them more than just the original tax bill.
There are several exceptions stated in the Internal Revenue Code. For example, they do not have to report the income on their tax return if the write off of the debt is intended as a gift, you discharge the debt in bankruptcy, or they were insolvent before the creditor agreed to settle or write off the debt. They should consult a qualified tax and legal counsel to see if these circumstances apply.
image 2:arvind balaraman/freedigitalphotos.net
Joe Petrowsky, NMLS #6869
Right Trac Financial Group, Inc. NMLS #2709
110 Main St.
Manchester, Ct. 06042
Office: 860 647-7701 x116
Fax: 860 647-8940
Cell: 860 836-9294
Joe Petrowsky does not guarantee nor is in any way responsible for the accuracy of the information provided herein, and provides said information without warranties of any kind, either expressed or implied.
Equal Housing Statement: We are pledged to the letter and spirit of U.S. policy for the achievement of equal housing opportunity throughout the Nation. We encourage and support an affirmative advertising and marketing program in which there are no barriers to obtaining housing becuase of race, color, religion, sex, handicap, familial status, or national origin.