Not all principal residence short sales and foreclosures are tax exempt
Former homeowners who had a short sale or foreclosure of their principal residence during 2009 are facing a challenge when preparing their income tax returns.
“When there is a cancellation of debt relating to a principal residence, different results may apply depending on the facts,” says Michael Gray, CPA, author of the Real Estate Tax Handbook. “If the loan was refinanced and cash was used for a purpose other than home improvement, like to buy a car or take a vacation, that part of the loan doesn’t qualify for the federal tax exclusion for cancellation of principal residential indebtedness. If the loan was ‘non-recourse’ (the lender can only look to the property for repayment), the short sale or foreclosure should be reported as a sale for the balance of the mortgage.”
“Some people are simply reporting the cancellation amount from information returns reported by the lenders as income, which is probably wrong, resulting in paying too much tax. To top everything else off, different rules may apply for state income tax reporting. For example, California hasn’t conformed to the federal exclusion for 2009.”
Michael Gray “wrote the book”, the Real Estate Tax Handbook, about real estate taxation and can give your audience vital information they need right now. To interview him, call 408-918-3161.
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