Monday, May 21, 2007

Do forgiven loans create a tax liability?

This weekend I read an article in the Buffalo News Real Estate Section (can't find link) which indicated that if your lender forgave part of your debt on your home that you would face a big "capital gains" tax from the IRS. The lender is required to send the IRS a list of forgiven loans and the IRS sends the taxpayers a bill according to this article.

My first thought was "holy $%^# I've screwed a couple of people here" (one bank sold me a property for $5k on a $71K loan). But my second thought was "what about the exclusion for homeowners?" There was no mention of that in this article.

So I did some research and it seems that my second thought was right. The homeowners exclusion gain will keep the IRS wolves outside. However, if you sell an income property using a short sale, you will probably owe lots of taxes even though you sold at a loss.

So, if you are concerned about tax consequences of selling your home - don't be.

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