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Hi and welcome to another segment of “Most Common Asked Questions with Wells Realty and Law Groups”. As always, you can ask questions in the comments below this video or you can send us an email. Today’s question is, “What are the tax consequences of a short sale, foreclosure, loan modification or deed in lieu?” There are so many different ways that taxes can affect you when related to mortgage debt. People who don’t do this properly can end up owing thousands of dollars to the IRS; it’s a very misunderstood area of the law, even by some accountants that supposedly deal with this on a daily basis.
The confusion comes from the IRS and tax code; they view the cancellation of debt as a taxable event. If you have debt that is forgiven or gets cancelled, they look at that amount of money as income and want you to pay taxes on it. The IRS could look at all of these situations, foreclosure and foreclosure alternatives, as cancelled debt and want to tax it. The good thing is that in Arizona, most people are okay because we’re an anti-deficiency state. If you loan qualifies for anti-deficiency protection then you get to walk away and don’t owe anything back to the bank. If you don’t owe anything back to the bank you don’t’ have to pay taxes on that money. You’ll hear a lot of things out there that by the end of the year this is all going to go away and you’ll have to start paying taxes on forgiven debt but this isn’t actually the case. If you have professionals, like us, you’re more than likely going to be okay even after the Mortgage Forgiveness Debt Relief Act goes away. The benefit of the MFDRA applies to everyone in the country and makes the tax filing process less complication after you’ve completed a foreclosure or a foreclosure alternative. The MFDRA is going away at the end of 2013 but Arizona still has the anti-deficiency protection. So, if you’re transaction isn’t completed by the end of 2013, you’re still in a place where you could be alright; it just comes down to whether or not you’re protected by the anti-deficiency laws.
Contact us because we’d love to talk about your situation and offer a free consultation to discuss your situation. Reach out to us through this page or give us a call. Even if you’ve already completed a short sale and still have questions about tax consequences we’d be happy to answer those as well. These services and more are why We Do What Agents Can’t.[/fusion_builder_column][/fusion_builder_row][/fusion_builder_container]