Solutions to tax forgiveness on short sales

short sale sign: forgiveness tax reliefLos Angeles property owners facing foreclosure are concerned about tax forgiveness on short sales. Homeowners who are concerned about their future do all they can avoid foreclosure. Fortunately for some, California has special provisions for those facing foreclosure.

In preparing for a short sale, the sellers often ask: Are there exemptions from the taxation of cancellation of debt income?

According to the California Association of Realtors, there are four circumstances under which the taxpayer can get relief from taxation on cancellation of debt income:

  1. The taxpayer is insolvent (the taxpayer’s debts exceed their assets, but the cancellation of debt is forgiven only to the extent of the insolvency).
  2. The debt is discharged as part of a bankruptcy proceeding.
  3. The debt discharged is qualified farm indebtedness.
  4. The debt discharged is qualified business indebtedness.

If a homeowner can’t pay the mortgage on his or her home there is a fairly good chance they are insolvent. If you are considering foreclosure or a short sale in Los Angeles or Ventura County, I strongly advise you to speak to your own tax adviser about IRS form 982 (PDF) and whether you meet the meet the insolvency exemption.

We are entering another cycle of real estate in Los Angeles and Ventura counties. First we had the bad loans: The A’s, The Alt. A’s and the subprime. Many of the loans that drove people to become distressed property owners are gone.

But we now are seeing an uptick in foreclosure activity. Foreclosure filings recently saw the largest monthly increase in four years.

Darren Blomquist, vice president of RealtyTrac, said of the spike seen in late 2014:

Last quarter’s foreclosure numbers are not a complete surprise given that over the past three years there has been an average 8 percent monthly uptick in scheduled foreclosure auctions in October as banks try to get ahead of the usual holiday foreclosure moratoriums. … But the sheer magnitude of the increase this year demonstrates there is more than just a seasonal pattern at work. Distressed properties that have been in a holding pattern for years are finally being cleared for landing at the foreclosure auction.

irs logo for tax form short saleIf you are one of the unfortunate Los Angeles homeowners facing foreclosure, ask your tax adviser about IRS form 982 and see if your “phantom” tax can be forgiven because of insolvency.

There are alternatives to foreclosure. Keep in mind the impact of credit on a foreclosure.

There are solutions to tax forgiveness on short sales for property owners in Los Angeles.

Let’s talk about your options. Call me, Cindy Marty, at (310) 663-9472.

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