tax on short sale, pls help

18 months back I bought house in Turlock,CA for 265,000 with 100% financing.
1st loan is 212,000, 2nd loan is 53,000. house is rented but does not cover mortgage payment.
Now home value is dropped to 225,000 or less.
Currently loan is in default and My realtor is helping me short sale it. Realtor is suggesting me to drop the price to 214,000.

I was concerned about tax consequences if it sales for 214,000.
But realtor says that there wont be any taxes to pay for this short sale as mortgage is 265,000 (100% financed) and is also non-recourse loan.
However I was wondering I will be 1099 by 2nd mortgage company as they will not get much and they will show debt relief on there loss 50,000 amount.

Will I have to pay taxes on this short sale? help please.

Some lenders will 1099 the owner on the amount they discounted. From what I understand, there is a form you file with the IRS explaining the reason for the deficiency. I’d talk to a CPA in your area who is familiar with that tax code.

new vocabulary words for you:

Deficiency: (foreclosure block sale)

if your property went to the foreclosure block and it was sold for less;( California is a non deficiency state); the bank will take the house and not pursue you for the deficiency. (unless you go judical foreclosure)
or your loans were not non recourse.(non recourse is sometimes an issue with the second mtg lender. )(ck with your atty and CPA)

Debt forgiveness:(short sale)

when a lender forgives a portion of the loan the IRS requires them to issue a 1099c for unearned income (ie:loan balance forgiven)
As of Friday; August 31st, 2007 Pres. Bush is asking for the removal of the debt forgiveness rule for purchase money loans

bottomline you will have a potential tax bill for the debt forgiveness but not for the deficiency.

i am not an Attorney or tax professional; pls seek their counsel.

if your RE agt is licensed to sale in California the CAR (Calif. Assoc. of Realtors) have many forms for you to sign outlining the tax issues with a short sale… NODPA (Notice of Default Purchase Agreement) is one form their are others. if your agent does not know of these forms i would consider finding a agt that does. just my opinion…

PS: NODPA does not apply to Non Owner Occ properties but it does inform you of the potential tax issues…

Generally speaking, if you are insolvent at the time the debt is forgiven, you do not owe tax on the “income.”

Prepare a financial statement as of the date the debt was forgiven and have it ready to attach to your tax forms when you file for the year in which you get the 1099. There’s also a form from the IRS that goes along with this.

I know first-hand that this works and that the tax liability can be forgiven in this manner.