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Short sale of a home may not be taxable income, though similar options with debt settlement may carry dangers
By Peggy Stillwell on Mar 3rd, 2010
Given difficulties in the housing market, and the fact that it is harder to find a job, some consumers may find that they can't keep up on their mortgage payments.
As a result, they may consider a short sale of their property, as did one reader of Liz Pulliam Weston's financial column. However, people who do that may find they get a 1099-C tax from their lender, meaning they might have to include that short sale as income.
Pulliam Weston said that there may be some relief when it comes to taxes a person ends up owning on forgiven debt or a short sale. She said that the Mortgage Forgiveness Debt Relief Act of 2007 may give an exception to the amount a person owes given a foreclosure or selling a home for less than it is worth.
Though they will still have to report the forgiven amount, it won't be including in a person's income if the home was their primary residence, the debt forgiven is less than $2 million and was discharged between 2007 and 2012.
A short sale is not the only way a person can have their debt reduced. Some people may consider debt settlement for the amount they owe on their credit cards.
However, officials from a number of states have expressed concern over debt settlement, citing the fact that the practice could land people further into debt.
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