Hello all,
We are in the process of completing a short sale on our condo in Chicago, IL. From what I can gather, the Mortgage Forgiveness Debt Relief Act of 2007 provides that the amount of the debt cancelled in the short sale (the deficiency) is not taxable income because the debt was incurred to finance our primary residence. That part is pretty straightforward. What I can't seem to find any information on is how this could effect our state income taxes. Does anyone know if the state of IL has any special provisions related to cancellation of debt income? I tried looking at the IL Income Tax Act on the state's website, but I have a headache trying to decipher all that legalese. Can anyone explain it in plain english, particularly if you have been in this situation within the past couple of years? From what I can tell, you need to file forms with your federal tax return related to the cancelation of debt income, and then that income, while reported, is not included in your taxable income. So does that translate to the State tax returns, or do we have to include it in the State returns? We use TurboTax for our taxes each year. This information is for 2012 taxes. I know I'm way ahead of the game since they won't need to be filed until next April, but we'd like to be prepared. I'm sorry if this is confusing, I'm no tax professional, but I hope someone out there knows what I'm talking about. Thanks for your help!
My opinion is when you start getting into issues like this, it is WAY worth the extra cost to hire a professional that has expert experience with this. Good luck.
I'm with Jo, I'd get a CPA involved. We had a foreclosure and it did not count as "income" in CA because it was a mortgage on our primary residence. The tax schedules involved with it were somewhat mind-boggling, but we hired an accountant to help sort it all out.
I am not sure how to answer your question, but I do have advice. Ask a Tax professional. My husband and I used turbo tax until we bought a house, now we have a great guy doing them with us and we can call him whenever we have a tax related question during the year. He also gets us between 200-300 dollars more than Turbo Tax.
No clue on the taxes, but beware the credit score hit.
A short sale is scored on your credit report as just above a foreclosure. It ain't a foreclosure, but it's close. Just fyi.
We had a foreclosure, and for that years taxes we went to someone to help us file! So much confusing paperwork ;) If you will be taxed on the difference I believe they have until the end of January to send you the tax papers. We had an 80/20 loan and with the foreclosure only the 80 loan got paid leaving us having to pay the 20 loan! Luckily they accepted our offer of paying 10% of it and that difference I think you can be taxed on. Not sure about how it works with short sales. Good luck with everything!
I did a short sale in 2010 and we had our taxes done by a special H&R Block. It didn't affect the state taxes at all. Just have it done by a professional and you should be fine.
This is worth asking a tax professional. It's something a decent one should be able to answer over the phone.
The laws are tricky and vary from state to state. Our CPA this year cautioned us to be very careful if we end up getting a short re-fi, which is sheltered from federal taxes by the same federal law that protects short sales. States *can* exclude the income but don't have to. In Massachusetts, the reduction in principal is not taxable if the person is insolvent (net worth is negative). So if this ever comes through for us, we still need to make sure that on the day the re-fi happens, our debts outweigh our assets. Check with a CPA in your state to be sure.
You will more than likely get a 1099 from your mortgage company. Here is an example: If the amount you were short is $50,000, the amount you will owe on your state taxes is $5,000. You can ask your realtor or mortgage company for more details. I think it would be in your best interest to get an accountant.
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We just paid significant state income tax on the 1099 for our short sale in IL; However, it was on a 2nd home that we'd purchased for a disabled family member. It's my understanding that the Relief Act only applies to Federal income tax, but I'd agree with the other mamas and consult a tax professional to be sure.
Honestly I looked over the law and looked at it as it relates to tax. Next year may be the year you get an accountant. The law appears to be straight forward no taxes but then I have never seen a tax law that didn't come with its corresponding loophole.
Just at face value you should be fine. I would not accept face value.
Oh hell I didn't actually answer the question. Your taxable income is determined by your for AGI income. When I was looking at that law it appeared to be not reportable or for AGI. If that is the case your AGI would flow into the state taxes so it would not be reportable for state either.
