Short Sale Approved in WA and further Tax Complications?

I have bought a home in Seattle WA with all the dreams on September 2009 for $266,500 and we lived happily until March 2011 but due to job i had to move to Texas. And i have approached a Realtor to put the house on sale due to my financial situations and i no longer was able to pay my Mortgage. To my surprise the property value in my community took a dive and my house was only valued at 200000 and my Realtor suggested that i had only two option

a. Short Sale and

b. Foreclosure

And since i don't want to walk out i made my mortgage payment for couple of months and opted for a short sale but unfortunately due to medical expenses i could not continue my mortgage payment and stopped paying my mortgage. And on the third month i got my short sale request approved with a buyer with more value than the buyer has offered and the buyer does not want to buy it so the House came to the market again.

Fortunately i got another buyer and the bank approved the short sale after 6 months on November. Now the house is in the closing process and i was worried if i have to pay the tax on the balance amount of 60000$ for the Tax year 2011 since the bank waived the balance and approved the short sale. I know for sure i have to pay back the allowance amount of 8000$ i got from the Government but not sure about the amount that was waived by the bank. The approval letter i got from the bank states

"Wells Fargo N.A Bank has approved the sale of the above referenced property This sale will result in a short payoff of the mortgage, and the mortgagors(s) acknowledge they waive any and all the rights to any escrow balance, insurance proceeds or refunds from prepaid expenses, Neither the mortgagors nor any other party may receive any sale proceeds or any funds as a result of this transaction except as noted in this demand statement. As agreed, when we receive the sale proceeds and all required documentation, we will notify the credit bureau to reflect 'Agreed settlement short of full payment' which would appear on the credit report within 60-90 days from the sale date and within 60 - 90 days from the date of notification and waive any deficiency rights if applicable"

My Questions are:

1. What are the Tax Complications i would face after this Short Sale.

2. I have paid mortgages until July and spent all the money to maintain the house including HOA, Water, Electricity and GAS and cleaning and Maintaining lawns etc. Can i itemize in this year tax return? Please advise.

3. I also have 6800$ medical expenses for this year.

4. Since i have moved to Texas from WA i have spent almost 8000$ for the moving expenses.

Appreciate your reply! Please advise.

Update:

Please let me know if i will get relief from this act.

H.R. 3648, the "Mortgage Forgiveness Debt Relief Act of 2007." The legislation is effective for discharges of indebtedness on or after January 1, 2007 and before January 1, 2010. The Federal Bailout Legislation H.R. 1424, passed on October 3, 2008, extended this relief through December 31, 2012.

Update 2:

This house was my primary residence and i currently live in a rented apartment.

3 Answers

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  • 8 years ago
    Favorite Answer

    That's a lot of questions, so I can only give you a start. There're important details that I will have to skip over. To be safe, it's a good idea to consult an accountant specializing in real estate.

    1. The short sale itself probably will not cause you extra taxes. The house will be sold at a loss which does not change your taxes up or down, and the sale itself does not even need to be reported. However, if WF does indeed waive your $60k balance, it will issue form 1099-C, Cancellation of debt eventually, most likely in 2012. That income should not be taxable to you, under one of the two relevant provisions:

    a. you probably could be considered "insolvent" for tax purposes and/or

    b. you probably qualify for relief under Mortgage Forgiveness Act.

    Whenever form 1099-C is issued, you will need to complete IRS form 982 with your tax return to claim your exclusion.

    Beware that WF may still hold you liable for the balance - check with a local real estate attorney. The language above ("if applicable") seems to give them an opening.

    2. You may be able to itemize for 2011 but there's no way to tell until you do numbers. You can claim half year of mortgage interest plus half year of property taxes (if you paid them) plus sales tax allowance plus donations plus possibly medical. These could exceed your standard deduction. However, you cannot include items that you listed: HOA, utilities and maintenance. They are not deductible.

    3. Medical - depends. If your total income for 2011 was $70,000 you start by taking 7.5% of it which is $5,250. You subtract this $5,250 from your $6,800 and arrive at $1,550 - which is the deduction you can include in your itemized deductions Schedule A. This is not a lot, but still some useful deduction. But if your income is higher, then 7.5% rule can swallow your medical expenses completely.

    4. If your moving expenses were not paid by your new TX employer, then you may be able to deduct it using form 3903. However, read the instructions to that form carefully (see my link). Only some of the moving expenses are tax-deductible, so a lot of what you included in your $8,000 figure may not be eligible.

    5. You mentioned repayment of your $8,000 credit. Are you aware that you may be relieved from that as well? You only repay it up to the amount of gain - which in your case is a loss.

    Your situation seem to be fairly complicated. It may be worth it to hire a tax professional this year. Just that $8,000 repayment alone is big enough to not mess up.

    Michael Plaks, EA, Houston TX

    Specializing in Real Estate tax law

    www.MichaelPlaks.com

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  • 8 years ago

    1) You will receive a 1099 from the bank - you may or may not owe taxes on the amount that the bank writes off - see a good tax accountant.

    2) No, you can't itemize any of this - these are all living expenses and not deductible

    3) You may or may not have a small deduction - medical expenses are deductible only to the extent that they exceed 7.5% of your AGI

    4) No deduction

    All in all, you need to see a good tax accountant to make sure that you have availed yourself of all legal tax writeoffs.

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  • 8 years ago

    Taxes - due to the Mortgage Forgiveness Act, if this was your primary acquisition loan so was never refinanced then the outstanding debt is forgiven. IF you did refinance the amount you used to improve your home is forgiven but the rest is not.

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