Dodging The Income Tax On Foreclosure & Real Estate "Short Sales"

An article by Kevin McCormally of Kiplinger.com is the first article in a mainstream media outlet that I have seen that, when discussing the income tax consequences of a both a foreclosure sale and a real estate "short sale" (when a mortage lender forgives or cancels a portion of a loan secured by property that is worth less than the full outstanding mortgage balance), also mentions one of the most frequently applicable exceptions to the rule (found in Section 108 of the Internal Revenue Code).

The general rule is that when a lender cancels a portion of the mortgage loan, the homeowner has to include the amount cancelled as income. One exception to this rule, referred to as the insolvency exception, essentially says that to the extent you are insolvent, you don't have to include the cancelled portion of the loan as income. The article even points out that the taxpayer is to use IRS Form 982 to claim the exception.

The article concludes with a sound word of advice:

• "If you benefit from debt forgiveness after a foreclosure or short sale, be sure to make a careful inventory of your assets and liabilities at the time. You'll need it to claim an exception under the insolvency rule."

For more, including an illustration of how the exclusion works, see Lose Home, Pay More Tax (As foreclosures soar, a cruel tax rule rears its head).

See also:

• Debt Forgiveness On "Short Sales" Not Always Subject To Income Tax,
• IRS Publication 4681: Canceled Debts, Foreclosures, Reposessions and Abandonments.

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