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So if a couple owns a house with a mortgage of $300,000 and they sell it in a short sale for $225,000, the tax code sees that as a benefit of $75,000 and tax it as income. The mortgage will issue the couple a 1099-C for $75,000 and the couple will be required to add it as income on their tax return. This can significantly increase their tax obligation.
Congress has extended a law preventing the IRS from taxing this reduction of debt through 2014. That means anyone who sold their home in a short sale in 2014 will not pay income tax on the amount forgiven. It is not clear if Congress will extend it into 2015. Reports state Congress discuss extending it for two years but the final bill only extended it through 2014. http://bit.ly/1HO2GUC That means anyone having problems in the new year will be betting on or hoping for an extension in 2015. This problem can be avoided in Bankruptcy. I'll explain that in another blog.
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