Fairfax VA – For many Fairfax VA taxpayers, the term IRS is something that instills fear in them. Here’s what I think about the whole forgiveness thing. Remember, as with all of my writing, all of the info stated below is my personal opinion on this subject. This is not legal or accounting advice. You should talk to a competent legal or accounting professional before making any decision.
Regardless of whether you give the house back to the bank or do a short sale, you will have Forgiveness of Debt Tax Liability. It’s true! Before I started doing a lot of short sales, I believed that it was more likely for a home owner to get a tax hit with a short sale versus a foreclosure. My thinking was, why do a short sale if you then have to pay taxes on the bank’s loss.
Little did I know that you get hit with the tax liability whether the bank forecloses or you do a short sale.
The way the government sees it, this is money that you received and never paid taxes on. If you lose your Fairfax VA home through foreclosure, the bank takes your house and resells it. However, the amount of debt that’s supposedly being “forgiven” will be much bigger.
Why? Because the bank will lose a lot more money. For instance, consider a case in which Countrywide turned down a Fairfax VA home sale for a short sale. The agent made them an offer of $385,000 but then it was rejected. The bank figured it could get more money by foreclosing the home and then re-selling it.
But then when the bank tried to sell the home, it was unable to get $230,000 for it. Essentially, this transaction left the Fairfax VA homeowner with more than $210,000 in debt being forgiven.
If the bank had just taken their original Fairfax VA short sale offer, the homeowner would have only had $35,000 in debt forgiven. That’s quite a difference.
But since the Mortgage Forgiveness Debt Relief Act passed in 2007, everything has changed. Before this act, when a lender decided to forgive all or a portion of a borrower’s debt and accept less, the forgiven amount was considered as income for the borrower and was liable to be taxed.
However after the 2007 act passed, lawmakers created amendments that remove such tax liability and allow the borrower and lender to work freely together to find a common solution that benefits everyone.
This protection only applies to primary residences — rental properties are ineligible for relief — so consult with a tax adviser. Total forgiven mortgage debt allowed to be excluded from income tax is limited to $2 million per year.
Here is what all of this means to you as a Fairfax VA home owner: It gives you plenty of tools to hold off the bank from collecting a deficiency judgment from you. If your bank files a 1099 for the lost income after you do a short sale, then they cannot collect money from you after that.
And you can easily get rid of any tax liability by filing a Form 982 with your tax return. But again, please consult with your tax adviser!
Thanks for reading this,
Thierry is a Real Estate Agent at RE/MAX Premier, and Host of Talk Radio’s, ‘Inside Real Estate’
Phone: (703) 322-0600.
Thierry Roche specializes in loan modifications and short sales in Fairfax Virginia. Fairfax Loan Modification Help. Fairfax Short Sales. Fairfax Short Sale Realtor. Fairfax County Short Sale Realtor. Fairfax VA Short Sales. Fairfax Realtor.
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