*It is a tax;
*It comes to us from the federal government (IRS);
*It involves anytime we have a debt owed;
*When a lender forgives that debt owed (as in a short sale or foreclosure), we have additional income of a like amount.
*That income is taxed to us at the same rate of our ordinary employment earnings;
*Every short sale will generally produce some forgiveness of debt;
*Every foreclosure will also generally produce forgiveness of debt (commonly misunderstood);
*Up until December 31st last year, most of your customers were exempted by a law that expired at the end of last year.
*That law is not expected to be extended or reintroduced as far as we can determine.
So how do we handle this tax matter in 2015?
*It is still a tax;
*It did not go away;
*The previous Mortgage Debt Forgiveness Relief Act did expire last year;
*We have a marvelous law still in place that provides an identical outcome;
*We call it the insolvency exemption;
*It is a well-established tax law that is a huge part of our practice.
So what is this insolvency exemption and how does it work?
*It also has been a good law for many years before the Recession;
*It is a good law now and won’t expire;
*It helps owner occupants as well as non-owner occupants avoid taxes;
*It eliminates forgiveness of debt tax for most of our clients;
*We look at the seller’s debts and assets and determine what level of assets versus liabilities (debts);
*If debts exceed assets, then no tax;
*If assets exceed debts, tax only payable to the extent of the solvency.
*It causes sellers to feel comfortable selling short knowing their tax outcome is favorable.
*Most sellers will qualify and pay no tax. Others pay reduced amount of tax
What is the Biggest Misunderstanding regarding this Rule?
*Many parties are out there today advising parties to just go through foreclosure as that is a more favorable outcome… WRONG!;
*Foreclosure will almost always produce a greater tax cost and far greater credit impairment than a short sale;
*A seller has far more control in a short sale.
Here is a link to a video explaining all of this:
The Link: https://www.youtube.com/watch?
Today's blog courtesy of Ed McFerran, McFerran and Burns