Thursday, August 27, 2009

Foreclosure, Short Sale or Loan Mod? Watch out for the Tax Man

Generally, when debt is forgiven, that is a taxable event. Right now there are quite a few federal tax exceptions for your primary home. These are good through 2012. The bad news for California homeowner is that if you have a short sale, a foreclosure or a reduction in principal as part of a loan modification, you could have a taxable event. This article, "Those who lose homes may face state tax hit" in the San Francisco Chronicle is a good explanation of this dilemma.

Some other exceptions to the tax are if you are bankrupt or insolvent or if the debt forgiveness is on the loan that you used to purchase your home.

So if you will be the recipient of some kind of tax forgiveness on real estate, I highly suggest that you speak with your accountant. See if you qualify for any of these exclusions or have your accountant calculate your tax liability. Then you can see if walking away from your home or a short sale is worth it.

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