How Does a Short Sale Affect Your Taxes?

Don't Let Tax Fears Stop You

If you're afraid to pursue a short sale because of potential tax consequences, you've likely been misinformed. In most cases, homeowners incur zero tax liability in a short sale — assuming taxes are prepared properly. We have worked with thousands of homeowners, and the vast majority owe nothing.

Many people falsely believe that forgiven debt from a short sale automatically results in a large tax bill. That's simply not how it usually works.

What Happens to the Remaining Debt?

When your lender agrees to forgive the outstanding mortgage balance after a short sale, that forgiven debt is reported to the IRS as income. At first glance, that sounds alarming — but there is much more to the story. Federal law provides significant protections for homeowners in exactly this situation.

The Mortgage Forgiveness Debt Relief Act of 2007

The Mortgage Forgiveness Debt Relief Act allows taxpayers to exclude up to $250,000 of forgiven mortgage debt from their taxable income, provided the debt was on a primary residence — meaning a home you lived in for at least two aggregate years over the last five-year period.

If you are not eligible for this exclusion, there are still other options available. Every situation is unique, and we strongly recommend consulting a qualified tax professional. But in our experience, a short sale is better than doing nothing — in virtually every situation.