No Federal Debt Relief Income Tax for Short Sales

Author profile image

NO FEDERAL DEBT RELIEF INCOME TAX FOR SHORT SALES

A short sale in California is generally not subject to federal income tax for mortgage debt forgiveness, according to a recent letter from the Internal Revenue Service (IRS). C.A.R. worked closely with Senator Barbara Boxer to obtain this IRS guidance. We are also hopeful that we can promptly obtain similar guidance regarding state income tax for mortgage debt relief income from the California Franchise Tax Board (FTB), which has been awaiting this IRS letter.

Given that a homeowner in California generally cannot be held personally liable for a short sale deficiency (see below), the IRS stated in its letter that it would consider the mortgage loan as a nonrecourse obligation that is not subject to federal debt relief income tax.  The amount of indebtedness, however, must be reported as the amount realized for capital gains purposes. Of course, a principal residence is generally excluded from capital gains tax up to $250,000 for single taxpayers and $500,000 for married couples filing joint returns (under 26 U.S.C. § 121).

As background, California law generally protects a borrower from owing a deficiency after a short sale of a residential property with one-to-four units, including both first and junior trust deeds (Cal. Code of Civ. Proc. section 580e). Exceptions include fraud, waste, cross-collateralized loan, and a borrower that is a corporation, LLC, or limited partnership. For more information, see C.A.R.’s legal article on Short Sale Deficiencies.

Although short sale sellers of a qualified principal residence are currently protected against federal debt relief income tax under the Mortgage Forgiveness Debt Relief Act of 2007, that federal law is set to expire on December 31, 2013, whereas the tax exemption set forth in the IRS letter has no expiration date. Similar protection to the federal Mortgage Forgiveness Debt Relief Act for state income tax under California law has already expired on December 31, 2012. However, other exemptions from federal and state taxation of debt relief income are available, such as for bankruptcies and insolvencies.

Source: California Association of Realtors

Category : Blog

About Us

Since 1970 Rinetti & Co. Realtors has been selling residential real estate throughout the greater East Bay including San Leandro and Pleasanton. We are boutique real estate company with a single focus, exceptional customer service from start to finish. Rinetti & Co. has the experience and practical knowledge to adapt to changing market conditions while providing our clients expert advise when buying or selling a home. If you’re considering making a move please contact us and see the difference Rinetti & Co. Realtors can make for you.

Testimonials

The only realtors in San Leandro...You will not meet two finer or more ethical realtors. The best! - Gary S.

Rinetti & Co. turned out to be the perfect place for me to do business...I would not hesitate to recommend their services to anyone buying or selling property. - Mary K.

...As I am sure you are aware, a house is stucco, wood and nails, but a home is where a lifetime of memories are created. Our mother was very proud of her home, it meant so much to her.

- Trent B.

...Thanks for your patience, guidance & professionalism, you made this experience a great one that we will never forget...We can’t thank you enough, thanks a bunch!!! - Rocio R.

If anyone in the East Bay is looking to buy or sell a home, please consider my friends and agents Tianne Rinetti-Vittoria and Perry Vittoria! They helped us buy our house and did an amazing job! They go above and beyond.”

- Chris S.


San Leandro Office
1103 MacArthur Boulevard
San Leandro, CA 94577

(510) 568-6171

Pleasanton Office
231 Old Bernal Avenue, Suite 5B
Pleasanton, CA 94566
(925) 364-5013

Email Us

CA BRE Lic. #01461822

Send to Friend

Email Agent