Question:

How large is the real estate short sale tax burden?

Answer:

Homeowners not only lose their home through a short sale; also, the real estate short sale tax burden may be significant due to the fact that the balance that is waived by the lender is in fact considered as income.

Here is a real estate short sale tax example.

If your house was worth $200,000 but is now valued at $120,000 and you owe $150,000:

  • If the lender ever agrees to a short sale, they will accept $120,000 as satisfaction of the debt but the IRS will count the waived $30,000 as income to the homeowner. As a result of your real estate short sale taxes you are going to file for this fiscal year have to reflect income $30,000 higher than was actually earned. Not only you will have lost $50,000 equity on your house but adding income you never earned may put you in a higher tax bracket and squeeze you of even more cash.
  • If the lender never agrees to a short sale, it is possible that they wait and a higher bid shows up. However, statistics shows that after declining a short sale bid it takes more than a year to sell the property and often additional depreciation occurs, resulting in even greater real estate short sale loss.
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