Short Sale and the Taxman - Posted by Sheik

Posted by David M. Petrovich on April 01, 1999 at 12:47:18:

The textbook definition for insolvency would suggest that most people are, in fact, insolvent. While bankruptcy might suggest insolvency, there are many who seek bankruptcy protection without being insolvent.

Forgiven debt treated as income is a gray area. Suggest that you build into the deal future CPA fees for your homeowner. Find a CPA with experience in this area, who has committed to a position, remains consistent, and is willing to go to bat for your homeowner if necessary. It is all a matter of interpretation.

Short Sale and the Taxman - Posted by Sheik

Posted by Sheik on April 01, 1999 at 08:08:32:

As I understand it, if a lender accepts less than the balance of the mortgage (Short Sale), the “forgiven” amount will be shown as taxable income to the homeowner in the year of the transaction unless the owner is insolvent.

I have a pending foreclosure deal and I would like to negotiate a short sale with the lender but I do not want to screw the homeowner with a taxbill next year.

So here is my silly question. Does the homeowner have to prove that he is insolvent. If so, How? By filing Bkcy?

Bottom line. How can the homeowner avoid paying taxes on the forgiven amount of the debt?

Please comment. Thanks.


Section 108 of the IRC… - Posted by JHyre in Ohio

Posted by JHyre in Ohio on April 01, 1999 at 13:17:03:

says insovency occurs if liability > FMV of all assets immediately before debt is discharged. Do NOT need to file bankruptcy to prove this. FMV of assets is question of fact. Exclusion from income of the forgiveness applies ONLY to the extent of insolvency (e.g.- if I’m insolvent to the extent of $10, the excluded income can be up to $10). Also, tax attributes get chewed up on a dollar for dollar basis. For example, if I’m foregiven $100 tax-free, I must reduce basis in property by $100 (or lose credits, reduce net operating losses, etc.).

John Hyre