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"The home short sale has long been regarded as a lifeline for borrowers facing foreclosure. But many have also taken it as a quick solution to mortgage problems, not thinking about the ups and downs of the short sale process. The truth is that even after a home short sale, one may still owe money and even get pursued in court. One of the main consequences of a short sale are taxes,which may be charged to the seller the year of the short sale. Heres a quick guide to home short sale taxes and how you can deal with them.Why Are Short Sales Taxed?The IRS records the amount forgiven on a short sale as part of the sellers income. When a bank cancels part of your debt, the government takes it to mean that you earned money from the short sale process, even if you didnt pocket anything. Your bank usually sends you a 1099 form come tax season, which will tell you how much income was gained in the home short sale and howmuch you will have to pay.Can Taxes Be Avoided?The Mortgage Debt Relief Forgiveness Act of 2007 exempts home short sale sellers from tax consequences. It applies to residential homes sold in a short sale process from 2007 to 2012 and is good for debts of up to $2 million. If youre part of a married couple and you plan to file separately, you will be exempted for up to $1 million each.What If I Dont Qualify?The most common way to avoid taxes during the short sale process is to negotiate it with your lender. You can get your bank to waive the debt cancellation and not send you a tax form. In exchange, however, you give them the right to go after you for the debt you still owe, since it was no longer cancelled. Depending on state law, lenders may be allowed to seek deficiency judgments, meaning the court will order you to pay the difference.What If The Bank Claims The Deficiency?The deficiency claim covers the difference between your remaining balance and the home short sale selling price. When you ask them to waive the income, they are free to sue you or ask to claim any of your assets to pay the difference. Most sellers choose to pay the tax instead because a deficiency claim reflects badly on their credit report, on top of the score drop already caused by the home short sale.
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