Posted On May 18, 2012


Many Nevada Homeowners or Property Owners have lost their property to either a short sale or a foreclosure. Maybe you have been lucky enough to get the lender to waive the liability or deficiency. The great news is that is step one – got a waiver of deficiency, but many are wondering about the tax effect on this matter. Can we be forced to pay the IRS the amount that was written off?

Once the forgiveness on the mortgage debt is agreed upon with the bank, as the person on the loan, you will receive either a 1099-C (Cancellation of debts) or a Form 1099A (Acquisition or Abandonment of Secured Property) from the lender or closing attorney showing the balance of principal outstanding (Box 2) and the fair market value of the property (Box 4).

Now you might be wondering, what tax liability to the IRS might I have after a Short Sale or Foreclosure. The correct amount of the potential debt forgiveness income is the amount of the mortgage balance debt in excess of the fair market value at date of foreclosure/short sale. Another approach is you can use a different valuation on the Form 1099A if you have proof of a different value. For example, you have obtained an appraisal. However, the Bank’s selling expenses can be added to the value of the property, but they are also deducted from the fair market value along with basis (the amount you paid for the property) to determine the gain or loss, if any. As this is nonrecourse debt, it is treated as the sales prices.

Even if you own taxes to the IRS as a result of this short sale or foreclosure, there may be an exemption from paying the taxes. The first exemption is known as the primary residence exemption. This exemption includes homes up to Two Million ($2,000,000) of forgiven debt which is NOT taxable. This should be sufficient for many Las Vegas homeowners. This exemption is provided under the Mortgage Forgiveness Debt Relief Act of 2007. This exemption is currently set to expire at the end of 2012, although many in this area believe this exemption will be extended for a minimum of a few more years.

The second best exemption for tax liability forgiveness is commonly known as the insolvency exemption. This exemption does not require the property to be the homeowner’s primary residence. Essentially, you calculate the homeowners total assets and liabilities immediately prior to the foreclosure or short sale. If the total liabilities exceed the total assets, then the exemption applies. The worksheet used for this is IRS FORM 982. However, it is best to seek competent counsel for this process.

The only other possibility of tax relief deals if the property is a rental property and, under Internal Revenue Code Section 1231 the sale of a rental property at a loss qualifies as an ordinary loss to offset ordinary gains, not a capital loss subject to limitations.

At Randolph Law Firm, we understand dealing with Short Sales and Foreclosure Problems. Attorney Taylor L. Randolph has a Masters in Legal Taxation and is experienced with representing Nevada Homeowners with the major decisions rather to stay in their home or walk away with the least effect to them. If you’re worried about your home or are seeking competent legal counsel, call local Las Vegas Attorney Taylor L. Randolph for a free consultation of your legal rights. Call 877-1313.