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  • Robert Weed

Short sale tax forgiveness has expired

Short sale tax forgiveness has expired.

If your house is “under water” you need to read this.

The general rule of tax law is that debt forgiveness is income—if I lend you $1,000 and then say you don’t have to pay me back, you’ve made $1,000. And you’re subject to tax on that.

That matters in a big way when there’s a short sale. You could be taxed for the amount the sale is “short.” That tax was repealed for the duration of the housing crisis.—2007-2016. But that repeal is now expired.

So if you need to unload a property that’s “under water,” from a tax viewpoint bankruptcy is lots better. (There’s no debt forgiveness tax on debts wiped out by law in a bankruptcy.)

If you owe $340,000 on your house and get approved for a short sale at $300,000, you’ll get a $40,000 1099-c at the end of the year. And owe something like $15,000 in taxes.

If you file bankruptcy and give up the house in the bankruptcy, no tax.


Starting in 2017, you can get hit with the debt forgiveness tax on a short sale. You’ll get a 1099-C on the amount the short sale is “short.” And the IRS will expect you to pay taxes on that.

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