Beautiful 5 bedroom, 3 bath home located in a great location of Natomas. Home has been tastefully upgraded with gorgeous granite counters, hardwood floors and custom draperies. Immaculate, turn key home just waiting for you! Close to shopping, neighborhood pool and parks.  This Short Sale in Natomas has been assigned to a negotiator and should move quickly.  Contact Tom Gonsalves a top producing Sacramento Real Estate Agent/ Broker.
Listing #11068508
$199,000 (LP)

Price/SqFt:  85.67
3342  Hornsea Way,  Sacramento, CA  95834 *     Active Short Sale  (09/21/11)  DOM/CDOM: 0/0 Beds: 5* Baths: 3 (3 0) (FH)* Sq Ft: 2323* Lot Sz: 0.149ac* Area: 10834 Yr: 2003*

 Do I have a tax liability if I short sale my primary residence?

Many people are under the impression that due to the Mortgage Debt Relief Act they will have no tax liability when short selling a residential property. This is not always the case. The Mortgage Debt Relief Act applies to individuals short selling their primary residence and only applies to qualified principal residence indebtedness. This Act also expires on 12/31/12. Individuals who short sell a home will receive a 1099-C from the bank. This 1099-C is reported to the Federal and State taxing agencies and must be reported on the Federal and State tax returns. If the property in question is an individual’s primary residence, and the entire amount owing is qualified principal residence indebtedness then there will be no tax for Federal and State purposes.
 
2.  What is qualified principal residence indebtedness?
 
Qualified principal residence indebtedness [according to IRC Sec 108(h)] is the money, up to $2,000,000 ($1,000,000 if MFS) of debt incurred to acquire, construct or substantially improve the taxpayer’s principal residence. A refinancing of such debt also qualifies. The debt must be secured by the residence, and the taxpayer must have lived in the residence for 2 of the last 5 years.

3. How do I report the short sale of my rental property?

Short selling a rental property can be difficult to compute because there is a lot more to consider. Firstly, you must address whether or not the amount due on the loan is money used to purchase, construct or substantially improve that specific property. If there is only one loan on the property and that loan was used to purchase the property then the equation becomes much simpler. The cost basis on the property is the total purchase price plus improvements to the property less accumulated depreciation. This will give you the adjusted cost basis of the property. If the sales price is less than that amount you will generate an ordinary loss on your tax return.
The other side of the equation is the ordinary income you will report as a result of receiving debt cancellation reported on a 1099-C.
More frequently then not the amount of ordinary loss from the sale of the rental can negate all or a portion of the ordinary income from the cancellation of debt. If you find that you have more cancellation of debt than you do loss from the sale of the property then it is always important to consider the taxpayer’s level of insolvency. Insolvency can be another way of excluding the income. This is something that must be looked at very carefully and can get tricky, however it often benefits the taxpayer to have a professional with experience in this area to take a look at your specific situation and give you an idea of where you stand.

4.  How do I know if I am insolvent?

Insolvency applies when a taxpayer’s total debts exceed their total assets. To compute insolvency the taxpayer must complete the insolvency worksheet and include this information with IRS Form 982 with their tax return in the applicable year. The important thing to understand about insolvency as it relates to cancellation of debt from the sale of property is that your insolvency must be calculated immediately preceding the sale. This calculation must be completed before the property sells in order to report correctly even though the transaction is not reported to the IRS until the annual filing of the tax return. Additionally, when claiming the insolvency exemption a taxpayer may have to reduce tax attributes in the following year, meaning a Net Operating Carryover or a Capital Loss Carryover or possibly the basis in other real property owned by the taxpayer at the beginning of the following year. This is again a very complex issue and must be analyzed with a tax professional in order to understand to what extent these effects will be implemented in each individual case.

5.  What happens if I am partially solvent?

If you complete the computation and find that you are solvent by $20,000 but your debt forgiveness is $50,000 then you will only include the $30,000 in your taxable income for both Federal and State purposes. If you find that you are insolvent by an amount greater than your canceled debt then you will have no tax liability to either Federal or State.

Thanks to Dona Riolo for writting this great article!  This information was a great resource for Gonsalves RE Properties clients.  Contact us the top selling Sacramento Real Estate Agent.

Located in the highly desirable Garden of the Gods. Near great schools, parks, shopping and restaurants. Spacious layout with large bedrooms and a master suite upstairs.  Short Sales can be challenging, but Tom Gonsalves and his team of professionals have successfully closed many Short Sales in Sacramento.  We have helped people that have hardships and business people who have decided to walk away.  Our expertise in short selling homes will help guide you on how to approach your lender to line things up for a successful Short Sale.   Request a Free Short Sale Packet now!
Listing #11036634
$330,000 (LP)

Price/SqFt:  211.13
4321  Morpheus Ln,  Sacramento, CA  95864 *     Active Short Sale  (05/16/11)  DOM/CDOM: 26/68 Beds: 4* Baths: 2 (2 0) (FH)* Sq Ft:1563* Lot Sz: 0.150ac* Area: 10864 Yr: 1953*