Property values may rise and fall periodically due to fluctuations in the market and other factors. Because real estate values can decline in any market, there are some situationsÂ when an individual needs to sell a property quickly but may be upside down with a mortgage loan. If you owe more on your mortgage than the property is worth and cannot wait for equity to build in the property, you could sell the property for a loss and pay off the remaining mortgage balance with your own personal funds. Another option is to pursue a short sale. A short sale occurs when a lender agrees to accept a lower amount for the mortgage payoff than what is owed. While this can benefit you financially, there are some tax implications that you should consider before you proceed with a short sale.
The Current Tax Rules Regarding Short Sales
The tax code changes regularly, and the short sale tax implications 2014 will impact you if you completed the sale of the property in the 2014 tax year. When you sell a property, you are required to pay capital gains taxes on the profit from the sale when you file your tax return. There are homestead exemptions and other rules that may apply, and you can work with an accountant to learn more. When you sell a property on a short sale, the lender is forgiving a portion of your debt on that property. As part of the short sale tax implications 2014, you should be aware that the lender is required to report any canceled debt to the IRS.
Exclusions to this
With short sale tax implications 2014, you should also be aware that the Mortgage Forgiveness Debt Relief Act has created a homestead exclusion that may apply to you. If you lived in the home as your primary residence for two of the last five years, you may be able to exclude up to $250,000 of capital gains for individuals or up to $500,000 of capital gains for married couples.
The short sale tax implications for 2014 may mean that some property owners need to pay taxes on their property’s sale even when pursuing a short sale. However, the homestead exclusion may apply to many individuals. If you are interested in learning more about this, you may seek advice from your accountant before making the final decision to pursue a short sale.