Video:What Are Short Sale Taxes?

Transcript:What Are Short Sale Taxes?

Hi I'm Julian Block for About.com and today we are discussing short sale taxes.

What is a short sale? A short sale is when the owner of a home sells his or her home for a price that is less than the amount of the mortgage.

The Mortgage Forgiveness Act and Short Sale Taxes

What the Mortgage Forgiveness Act does, in so many words, is to say that if you own a home, and, you sell it and, whether is through a foreclosure or short sale, and the amount you sell it for is less than what you owe on the home and the bank or other lender forgives the amount that you owe, it is not going to count as reportable income on your (tax) return.

Now, that assumes you meet certain requirements in order to be eligible for this tax break.

Requirements for Short Sale Tax Breaks

The key requirement is that the home in question, what the IRS refers to as your principle residence or main home, meaning the place where you live most of the year.If you refinanced and used the money for something other than improving your home, for example, education, expenses or personal trips, there is no tax break for forgiveness for that kind of debt.

Filing Your Short Sale Taxes

What happens at filing time is that you get a 1099 filing form from the bank that shows the amount of forgiven debt. A copy of the 1099 Form also goes to the IRS. On your 1040 form, on the line that say "other income" — that's line 21 — on that amount you show how much debt was forgiven.

State Taxes, Tips, and Advice for a Short Sale

State rules are another complication on top of the federal tax rules. It may well be worthwhile for you to seek out the help of a qualified income tax professional. It could be someone like an accountant, an attorney, a financial planner, or an enrolled agent.

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