IRS Form 982

Before I write one word in this blog, I want to again reiterate, I am not a CPA, nor a tax attorney. What is being written here is just some basic information passed down to us that can be used for informational purposes as a starting point to see what potential tax savings there can be. This IN NO WAY, replaces speaking with these licensed professionals, and we highly advise doing so as it could save you thousands of dollars.

As we mentioned in another blog, there is potential for a large tax bill if you utilize a short sale, foreclosure, or deed in lieu of foreclosure. The amount of debt that is “forgiven” by your lender may be viewed as income for that tax year by the IRS.

The example that was given in that blog was very simplistic and most cases are more complex and have many, many more variable. However, you do need to be aware of the potential tax liabilities involved in a short sale.

Is there a way to avoid paying that tax? Possibly. Again, only a consultation with the appropriate, trained professionals can determine this for sure. However, IRS form 982 says, “Generally, the amount by which you benefit from the discharge of indebtedness is included in your gross income. However, under certain circumstances described in section 108, you may exclude the amount of discharged indebtedness from your gross income”.

The specific instructions are contained in section 108 of the Internal Revenue Code, and you will need to discuss these with your CPA or tax attorney. (Side note: Have you noticed that I keep referring to CPAs and Tax Attorneys? Just as all Real Estate agents are not equal, the same is true for accountants. In this very delicate situation, please make sure to either speak with a CPA or a tax attorney. Make sure you are protected.)

In this code, one of the “circumstances” they are referring to is that if you are insolvent then you may be able to “exclude” the forgiven indebtedness (the amount the lender forgave on the loan) from being added to your gross income for that year.

With that we get to the point of this blog. Here are some questions you will need to ask your CPA:

Can I avoid paying taxes on the forgiven debt if I was insolvent at the time of the short sale?
Do I have to file bankruptcy to be considered insolvent?
If you already used a short sale and paid taxes can you file an amended return and get a refund?
Do you have to surrender your property in bankruptcy to be eligible for relief?
Does a form 982 have to be filed in order to be eligible for tax relief?

Again, this is just a starting point, but hopefully you now understand how important it is to work with these professionals as well.