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Short sales and tax implications – do I need a new job?

An agent recently called me to discuss the tax implications of a short sale. He said that his seller was concerned about both the tax implications and future liability for the debt forgiven and was in the process of investigating both issues. Smart seller and a smart agent, too. These are very important points to consider before participating in a short sale.

(Caveat: I’m not an attorney or an accountant. I don’t even play one on tv. So, if you or your short sale sellers really want the skinny on the tax implications of a short sale, my best advice is to speak with a reputable accountant or tax attorney.)

Now that I have put all the cards on the table, note that I have no problem pointing agents and sellers in the right direction—where they can obtain accurate information.

Mortgage Forgiveness Debt Relief Act of 2007

If sellers are interested in learning more about the tax implications of a short sale, they need to read the Mortgage Forgiveness Debt Relief Act of 2007

Back in the day when real estate agents made a decent living selling real estate, anyone who had debt forgiven would receive a 1099-C. The difference between the amount owed and the debt forgiven would be considered taxable income. But, George Bush passed the Mortgage Forgiveness Debt Relief Act of 2007. After that, the impact of debt forgiveness on short sales became more favorable to many short sale sellers. The Mortgage Debt Relief Act of 2007 was extended through December 31, 2012 (you know… ten days after the world is supposed to end). So, short sale sellers who want to take advantage of the tax relief provided by this act would need to have their short sale closed by the last day of 2012.

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Remember, if you are interested in learning more about this Act, you and/or your sellers should speak with a qualified accountant in order to learn more about how this curtain may impact their specific situation.

What about the 1099-C?

Many short sale sellers will receive a 1099-C for debt forgiven. For some short sale sellers, this may mean that the amount of debt forgiven is considered as taxable income. It is the responsibility of the seller and the seller’s accountant to determine how to handle the 1099-C.

The agent who contacted me wanted to also chat about a really interesting point. What is going to happen on January 1, 2013? Will the Mortgage Forgiveness Debt Relief Act of 2007 be extended? If not, how will the lack of tax relief impact a seller’s interest in participating in a short sale? Will this be better or worse for our economy? How will this impact the short sale market? Gee, let me get out my crystal ball and see what it says.

I think what the agent essentially wanted to know is this: If I focus on short sales, do I need to get a new job?

What say you?

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Written By

Melissa Zavala is the Broker/Owner of Broadpoint Properties and Head Honcho of Short Sale Expeditor®, and Chief Executive Officer of Transaction 911. Before landing in real estate, she had careers in education and publishing. Most recently, she has been able to use her teaching and organizational skills while traveling the world over—dispelling myths about the distressed property market, engaging and motivating real estate agents, and sharing her passion for real estate. When she isn’t speaking or writing, Melissa enjoys practicing yoga, walking the dog, and vacationing at beach resorts.

26 Comments

26 Comments

  1. Brad Officer - Jacksonville Short Sales

    May 31, 2011 at 7:51 am

    I'm not too concerned about January 1st 2013. In my opinion, this business is about attracting home owners who want to sell their property right now. Part of selling real estate in 2011 is being proficient at completing short sales, so if the agent in question is in business this year – do short sales.

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