Do you pay taxes on a shortsale?

[Timothy Rogers]

Hello,

My wife's co-worker has a home in Savannah, Georgia that is upside down. She owes 45K, but property is worth less. She lives in Dallas and was renting the property out. The tenants moved out and squatters moved in and destroyed the property. She wants to know if she does a shortsale will she be taxed on it. I told her I would present the question to the BP forum. I did not want to give her an answer when I am not really sure myself. Please help her and myself with the tax question.

Thanks,

Tim.

[Steven Hamilton II]

Timothy Rogers and Bill Gulley,

The borrower will be issued a 1099-C for cancellation of debt. There is an exemption for cancellation of debt on principal residences with up to $2 Million in principal. There is another exception: Insolvency. If the borrower has a great enough negative net worth on the date of cancellation. Example: John's net worth is -50k. He incurs a cancellation on a credit card in the amount of 35k. He will pay no tax on that cancellation.

Typically with a cancellation of debt such as in the situation of a credit card which is settled. You will pay tax on that cancelled amount.

-Steven the Tax Guy

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