Short sale tax implications are probably one of the major concerns to a home owner. Many people think that after the bank approves their short sale, they’re done. The fact is that there are some tax implications that you need to discuss with your short sale agent when you consider short selling. I know that foreclosure could be devastating to home owners and that’s why they try to do a short sale in the first place, but there are other options which are considered safer for you.

Short sale taxes are simply taxes charged to the home owner after s(he) sells the property. The reason behind many short sellers falling into this trap is that many non qualified real estate or short sale agents don’t discuss short sale tax implications with their clients. Short sale taxes should be planned way before you short sell you property. Because as soon as the bank approves it and you complete the sale, the IRS will send you a 1099-C form on the amount forgiven by the lender. If you don’t know what the amount forgiven is. It’s the difference between your mortgage balance and the amount you sold the house by.

Let’s say that you have $200.000 on mortgage balance and you managed to sell the property at $150.000. The amount of lender’s losses will be in this case $50.000. Because the IRS considers the $50.000 as income for the short seller, it will be a subject of taxes.

How to avoid short sale tax implications?

In 2007, George Bush passed the Mortgage Forgiveness Debt Relief Act. Fortunately for you is that this act is viable until December 31, 2012. So if you want to benefit from this act, you definitely need to close the sale before this day. The other thing that you should also know is that the IRS eliminates forgiven debt taxes to up to $2 million ($1 million for couples who fill their returns separately).

Another way you could get rid of this tax is by talking to the lender (bank) into reclassifying your forgiven debt so it won’t be considered as an income for the IRS. Most banks will not agree this, but it won’t hurt if you just ask.

Being aware of the short sale tax implications, you could save yourself a lot of money and of course avoid any unpleasant accidents.

Many people, especially from outside the real estate market, try to get an accurate yet very easy to understand short sale definition. With today’s economy, homeowners had to find others ways to get rid of that mortgage which in many times exceeded the real value of their houses. Because of this, some people had to keep paying their mortgages in order to prevent foreclosure on their properties. While there are other ways to prevent foreclosure, short sales are considered one of the best.

The best short sale definition

A short sale usually happens when a house sells for a lower price than the amount owed on the mortgage. It’s probably the best choice for home owners to avoid foreclosure. When a home owner can’t afford to pay the mortgage on the house, it would be better to sell the house at a lower price than its actual value just to avoid the foreclosure penalty. As in most cases many sides hold the mortgage, you would have to convince all of them if you want to get a short sale. While getting a short sale isn’t easy as it looks like, there are some things you need to consider.

If you’re asking why on earth would the bank holding the mortgage sells the house for a lower price, then you need to realize that there will be devastating consequences for them as well if you fall into foreclosure. Every bank usually has a special department which exclusively studies short sales and each one of them has its own rules and qualifications. If they find that your short sale deal is better for them then foreclosure, then they’ll approve it.

Many bad short sale agents don’t know what they’re doing and that can cause many problems to the home owner. Many of them think that all banks will clear your mortgage remaining balance. If you happen to get your short sale approved by the bank, you need to read the agreement whether you’re still responsible for the remaining balance or not.

So if you were confused about what a short selling is and why it’s sometimes needed, I hope that this short sale definition answered some of your questions.