Does a short sale affect your taxes?
Are there tax implications from a short sale or foreclosure? Tax laws may require you to report losses from a short sale or foreclosure. If your mortgage lender forgives or cancels part of your mortgage debt, you may owe federal taxes because the IRS classifies relief as taxable income.
In the end, short sales are almost always damaging to your credit, but they do less harm than foreclosures or bankruptcies. A short sale might block you from a mortgage on a new home for two years or so, but a foreclosure or bankruptcy could keep you out of the market for as long as seven to 10 years.
After the short sale is completed, your lender might call you or send letters stating that you still owe money. These letters could come from an attorney's office or a collection agency and will demand that you pay off the deficiency.
In general, if your debt is canceled, forgiven, or discharged for less than the amount owed, the amount of the canceled debt is taxable. If taxable, you must report the canceled debt on your tax return for the year in which the cancellation occurred.
Short Sale: When a lender or lenders, agree to a short sale and sell the property for less than the full amount due, the amount of the debt that the lender writes off will be treated as ordinary income for the seller.
All of the proceeds of a short sale go to the lender. The lender then has two options—to forgive the remaining balance or to pursue a deficiency judgment that requires the former homeowner to pay the lender all or part of the difference.
Yes. There is no way to avoid the damage a short sale does to your credit score. A short sale can knock as much as 160 points off your credit score, but the level of damage heavily depends on your credit standing before the short sale and how much your lender gets in the sale, among other things.
Potentially limitless losses: When you buy shares of stock (take a long position), your downside is limited to 100% of the money you invested. But when you short a stock, its price can keep rising. In theory, that means there's no upper limit to the amount you'd have to pay to replace the borrowed shares.
If this happens, a short seller might receive a “margin call” and have to put up more collateral in the account to maintain the position or be forced to close it by buying back the stock. Given the market's long-term upward bias, many investors find it hard to short stocks and achieve consistent, profitable results.
For a short sale to happen, both the lender and the homeowner have to be willing to sell the house at a loss. The homeowner will make no profit, and the lender will actually lose money for selling the house for less than the amount owed. A short sale is not a do-it-yourself deal.
What is the downside of a short sale on a home?
The short sale is often preferable to a foreclosure, but it is not a resolution to all a homeowner's financial woes. Aside from potential tax liability and credit implications, if the homeowner is expected to pay the difference between the sale price and the mortgage, that can compound the financial difficulty.
A short sale will remain on your credit report for seven years. The starting point for this period depends on the timeliness of your mortgage payments. If your payments were never late and the account was in good standing at the time of the short sale, the period begins on the date of the sale.
In most situations, if you receive a Form 1099-C from a lender, you'll have to report the amount of cancelled debt on your tax return as taxable income. Certain exceptions do apply.
When this happens, the IRS won't tax the canceled debts as income. Your forgiven debt includes tax-deductible interest. If a lender forgives a business loan or mortgage, you don't need to report the interest as income because it would have been deductible anyway.
You may receive an IRS Form 1099-C while the creditor is still trying to collect the debt. If so, the creditor may not have canceled it. Contact the creditor and verify your situation.
Key takeaways. A short sale is when a mortgage lender agrees to let a homeowner sell their home for less than what they owe on the mortgage. Short sales often take place when a homeowner owes more than the property is worth. A short sale is different from foreclosure, which involves the repossession of a property.
Q: How does the wash sale rule work? If you sell a security at a loss and buy the same or a substantially identical security within 30 calendar days before or after the sale, you won't be able to take a loss for that security on your current-year tax return.
Can I claim a loss on my tax return? No. Losses from the sale or foreclosure of personal property are not deductible.
Put simply, a short sale involves the sale of a stock an investor does not own. When an investor engages in short selling, two things can happen. If the price of the stock drops, the short seller can buy the stock at the lower price and make a profit. If the price of the stock rises, the short seller will lose money.
Short Sale Benefits For Buyers
Although the short sale property will be priced according to market value, the lender is highly motivated to sell in order to cut the bank's losses. As a result, buyers can often get a better deal on the home than they would if it was purchased through a typical sale.
Why do banks prefer foreclosure to short sale?
Short sales actually bring the bank more money than they would receive in the foreclosure process. This myth that the bank would rather foreclose remains prevalent because of the extreme difficulty people face during the loan modification process.
A trader who has shorted stock can lose much more than 100% of their original investment. The risk comes because there is no ceiling for a stock's price. Also, while the stocks were held, the trader had to fund the margin account.
- Any buyer considering participating in a short sale should be aware of these issues:
- Short sales can take a long time. ...
- They are sold as-is. ...
- Make sure the lower price is really worth it. ...
- The good deal factor can be influenced by the market conditions. ...
- Less competition.
Short sales can be beneficial for all parties involved. They provide a greater return on investment for home buyers and minimize the financial repercussions that both lenders and sellers would face if a property went into foreclosure.
In most cases, suing short sellers is not an effective response strategy, even though there will often be an understandable desire to bring claims for defamation, stock manipulation or other unlawful practices.
