Do Investors Get The Same Tax Forgiveness as Primary Residence Homeowners?
The investor does not have the same right to tax forgiveness that owners of their primary residence. That means that if you sell your investment property as a short sale, you are likely to be hit with a hefty tax bill.
Owners of a primary residence are often eligible for tax forgiveness, but you must be very careful if you’re a short sale seller. Have an attorney review the contract or agreement from the bank and make sure you are not on the hook for additional payments. It’s cheap insurance.
An article from Sunday’s Baltimore Sun goes into more detail. The explanation is pretty clear:
“When an [investment property] owner sells a property through a short sale, the lender will send a 1099 for the difference between what was owed and the amount accepted on the loan.
The release of indebtedness by that lender — what you should have paid back the lender — is considered a “gift” from the lender to you. The IRS considers that amount to be taxable income. That’s why the amount that is forgiven is taxed.”
Many Daytona Beach condos and homes are underwater (worth less than owed on the mortgage). A lot of these properties were purchased as investment properties putting many people in this position. You really need to talk with your tax adviser and legal counsel to determine all your options before putting your property up for sale.