Many people consider selling their house as a short sale as opposed to a foreclosure to protect their credit history, but they are unaware of the tax implications of a short sale. Under The Mortgage Debt Relief Act of 2007 taxpayers do not need to pay the short sale tax if they are selling their primary residence as a short sale. However, this is not the case if the taxpayer is not selling his/her primary residence. In this situation, the amount that the lender is forgiving the taxpayer on his/her mortgage is considered income and therefore taxable. One way that the short sale tax can be avoided if the taxpayer is not the primary residence is the taxpayer can ask the lender to reclassify the forgiven amount and report it as a gift in which case the short sale tax will not need to be paid.
It is important to consider the tax ramifications when deciding on a short sale or foreclosure. Although a short sale has the advantage of protecting taxpayers' credit history, they should plan for the tax that accompanies the short sale.
Hopefully this helps.
Leona Zhu Assistant to Sebastian Wong
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