Selling a house is not an easy task to do. House owners always want to sell their houses at high prices so they can make a large profit. However, many house owners are often disappointed during the bargaining process. Most prospective buyers are only willing to buy at a Making Home Affordable, which is often below the owners' expectations.
Up till the end of 2006 the Internal Revenue Service treated the difference between what a mortgage company was owed on a loan and the amount they were actually paid as income to the person. The person owed tax on the full amount. In 2007 legislation was passed. For the years from 2007 through 2012, some or all of the difference between what the mortgage company is paid and what they are owed may not be considered income for federal tax purposes. In situations like this what would be considered as income for federal tax purposes? What would not be? First, the home on which you are facing foreclosure and which you are going to sell has to be your principal residence. If it is a second home or an investment property, you will have to report the full difference between what you owe on your loan and what your mortgage company is paid as income. You will owe tax on this. Next, you can only exclude as income that portion of the difference between what they actually received from the sale and the amount that you borrowed from the mortgage company to buy and improve your principal residence. Anything above that would be considered as income to you.
The inside of you house should look spacious and cozy, to attract prospective buyers. House with spacious rooms are usually valued higher. If possible, you can eliminate some unnecessary rooms in your home to create more space. Buyers prefer a house that has a good air circulation and exposure to natural light. Those are two basic requirements for a healthy house. You can install additional windows and sun tubes to create better air circulation and let more sunlight into the house.
Let's look at a different situation. Say you purchased a home for $158,000 in 2003. To buy it you got a loan of $150,000. The value of the home steadily increased. In 2006 it was worth $200,000. You decided then to refinance your loan for $180,000. The balance on your old loan then was $146,000. You used the money you got from the new loan to pay off some credit card debt and to buy a used car. In 2008 you lost your job. You have not been able to find a new job since then. The chance of finding a new job where you would make anywhere near what you made before is slim. You were able to make the payments on your loan until March of 2009. Since then you have not made any payments. The balance on your loan at that point was $175,000. You listed your home for sale. A buyer offered you $170,000 for it. The offer was sent to your mortgage company and they accepted it. The house sold. After the real estate commission and other costs, your mortgage company only got $159,800. The difference between $175,000 and $159,800 is $15,200. You would have to report that as taxable income. None of that money you took out when you refinanced your loan was used to buy or improve your home.
How is the Internal Revenue Service notified of what happened? A mortgage company has to send them a form 1099-C. This is a Cancellation of Debt form. On it they indicate the date the debt was cancelled and the amount of money cancelled. They also indicate the fair market value of the home. When they complete their federal tax return, the person has to complete a different form. This is form 982. On it they indicate the amount from the 1099-C that they are entitled to exclude from their income for the year. The Obama Administration has proposed that mortgage companies consider principal reductions in certain instances where people facing foreclosure have applied for loan modifications in the Making Home Affordable Program. The federal tax liability here is not as clear since the people are remaining in their homes.
If you have sold your home and it was through a short sale, you have already received or will receive a form 1009-C from your mortgage company. You can owe quite a bit in additional tax if you don't handle this adequately on your federal tax return. Rather than doing your taxes yourself you would be better off consulting a tax adviser. If you are considering short sale, consult a tax adviser as soon as you can. Find out whether or not you may owe more in income tax if you go forward with the short sale.
Up till the end of 2006 the Internal Revenue Service treated the difference between what a mortgage company was owed on a loan and the amount they were actually paid as income to the person. The person owed tax on the full amount. In 2007 legislation was passed. For the years from 2007 through 2012, some or all of the difference between what the mortgage company is paid and what they are owed may not be considered income for federal tax purposes. In situations like this what would be considered as income for federal tax purposes? What would not be? First, the home on which you are facing foreclosure and which you are going to sell has to be your principal residence. If it is a second home or an investment property, you will have to report the full difference between what you owe on your loan and what your mortgage company is paid as income. You will owe tax on this. Next, you can only exclude as income that portion of the difference between what they actually received from the sale and the amount that you borrowed from the mortgage company to buy and improve your principal residence. Anything above that would be considered as income to you.
The inside of you house should look spacious and cozy, to attract prospective buyers. House with spacious rooms are usually valued higher. If possible, you can eliminate some unnecessary rooms in your home to create more space. Buyers prefer a house that has a good air circulation and exposure to natural light. Those are two basic requirements for a healthy house. You can install additional windows and sun tubes to create better air circulation and let more sunlight into the house.
Let's look at a different situation. Say you purchased a home for $158,000 in 2003. To buy it you got a loan of $150,000. The value of the home steadily increased. In 2006 it was worth $200,000. You decided then to refinance your loan for $180,000. The balance on your old loan then was $146,000. You used the money you got from the new loan to pay off some credit card debt and to buy a used car. In 2008 you lost your job. You have not been able to find a new job since then. The chance of finding a new job where you would make anywhere near what you made before is slim. You were able to make the payments on your loan until March of 2009. Since then you have not made any payments. The balance on your loan at that point was $175,000. You listed your home for sale. A buyer offered you $170,000 for it. The offer was sent to your mortgage company and they accepted it. The house sold. After the real estate commission and other costs, your mortgage company only got $159,800. The difference between $175,000 and $159,800 is $15,200. You would have to report that as taxable income. None of that money you took out when you refinanced your loan was used to buy or improve your home.
How is the Internal Revenue Service notified of what happened? A mortgage company has to send them a form 1099-C. This is a Cancellation of Debt form. On it they indicate the date the debt was cancelled and the amount of money cancelled. They also indicate the fair market value of the home. When they complete their federal tax return, the person has to complete a different form. This is form 982. On it they indicate the amount from the 1099-C that they are entitled to exclude from their income for the year. The Obama Administration has proposed that mortgage companies consider principal reductions in certain instances where people facing foreclosure have applied for loan modifications in the Making Home Affordable Program. The federal tax liability here is not as clear since the people are remaining in their homes.
If you have sold your home and it was through a short sale, you have already received or will receive a form 1009-C from your mortgage company. You can owe quite a bit in additional tax if you don't handle this adequately on your federal tax return. Rather than doing your taxes yourself you would be better off consulting a tax adviser. If you are considering short sale, consult a tax adviser as soon as you can. Find out whether or not you may owe more in income tax if you go forward with the short sale.
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