How to Avoid Federal Taxes on Short Sales and Other Debt Settlements
One of the most difficult ramifications of our country’s recent economic difficulties is the thousands of short sales, foreclosures and other major debt settlements. Since 2008, when the economy took its historic nosedive, there have been an estimated 5 million foreclosures alone. Unfortunately, in addition to the obvious implications of these debt settlements, there can be difficult tax issues that arise as well.
Mortgage Forgiveness Debt Relief Act
In most cases, when you have to settle a debt for less than you owe, the difference between what you end up paying and what you owed originally is considered taxable income. Fortunately, there are some exceptions or exclusions that can help you avoid federal taxes on short sales and other debt settlements. You may have heard of the Mortgage Forgiveness Debt Relief Act of 2007. This act actually allows an exclusion for debt settlements that are forgiven on the mortgage associated with your primary residence. This is a huge break for millions of homeowners that have lost their footing with their mortgage. The tragedy of losing your home will not be compounded by having to pay taxes on the loss.
Other Possible Exemptions
Even if you do not qualify for the Mortgage Forgiveness Debt Relief Act, there are several other possible exceptions that might fit your situation:
- Your canceled debt or debt settlement is a result of a Chapter 11 bankruptcy.
- If your overall debt is higher than your assets before the canceled debt, you may also be exempt from having to pay for this difference as income.
More Questions Than Answers?
If you have been struggling financially and find yourself facing a foreclosure or a short sale and wonder how to manage your related tax bills, you may want to consider seeking some help with this complicated process. The last thing that you need is to find yourself owing a big tax bill after losing your home. A tax firm may cost a few extra dollars but may be able to save you time, effort and money. A reputable tax professional can sort out whether you must pay taxes on your short sale or other debt settlements or if you are protected by one of the provisions described above and help you communicate with the IRS.
Success Tax Relief Can Help
Success Tax Relief has more than 30 years of experience advocating on behalf of taxpayers. We understand that IRS rules can be complicated, difficult to understand and even harder to translate to your personal tax situation. There is already so much stress associated with facing bankruptcy, the loss of a home and mounting bills. Why add additional stress when you do not have to? Success Tax Relief can review your financial situation and quickly assess how much you owe the IRS…or whether you owe at all.
Contact us online or call Success Tax Relief at 1-877-958-6638 for a free consultation if you have questions related to avoiding paying federal taxes on short sales and other debt settlements. A trained tax professional will take your call and can start taking the stress away and help you come up with the best plan for submitting your tax return this year.