Short Sale Mortgage Debt Forgiveness
Q. I am thinking about doing a short sale of my home where the bank will relieve me of the net debt I owe on the mortgage. But I understand that if the bank relieves me of this debt, I have to pay income taxes on the amount of debt they forgive. Is that correct and how can I find more information. Barry N., Las Vegas
A. Hi Barry, this is a common, but pretty complicated subject. In general, up through the end of this year, thanks to the Federal Mortgage Relief Act of 2007, you can exclude the debt forgiven on a personal residence short sale or foreclosure. In 2013 that relief act expires. However, there are many other issues that could impact whether or not you owe taxes. So you need a professional tax adviser in this area to help you out.
If you do have to include the debt, you might have a loss on the sale of the property that you can net against that forgiven debt income. You might also be insolvent, technically, or in bankruptcy. All these items can impact your taxes and a property tax strategy may help you reduce your tax bill and reduce the impact of the unfortunate loss of your home.
Q. My parents are getting older and want to pass one of their properties to me as an inheritance. We’re trying to figure out if they should do this now as a gift, or in the will at their passing. I was told to take the property at their passing to minimize potential tax costs down the road if I sell the property. Jane A., Mesa, Arizona
A. Hi Jane – You definitely want to get some professional tax advice for this issue. It could impact your federal income taxes, estate and gift taxes, and state property taxes. So you want to make sure you are getting good advice and talk with an attorney about a revocable living trust to help on this issue.
In general, if your parents gift you the property before they pass, your federal income property tax basis will be their existing tax basis. If you sell the property, you’ll probably have a big taxable event and a big tax bill. If you take the property upon their passing, your tax basis will be the market value at the time you inherit the property (in general). If you sell the property after that, you will not have much of a gain and not much of a tax bill. In order to make sure you do it right and do all the estate planning to your advantage, work with a licensed tax professional.
Leonard Baron is America’s Real Estate Professor® - his unbiased, neutral and inexpensive “Real Estate Ownership, Investment and Due Diligence 101” textbook teaches real estate owners how to make smart and safe purchase decisions. He is a San Diego State University Lecturer, blogs at Zillow.com, and loves kicking the tires of a good piece of dirt!
Email your questions to: Leonard@ProfessorBaron.com
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