A concern of people that have elected to remedy their situation through a short-refi or short-sale, is the tax implication on the forgiven debt.
First and foremost, Affinity Home Loans, Inc. DBA Affinity Financial are not tax consultants and release ourselves of all liability and do not claim to be tax consultants in any way, shape or form. We advise you as a homeowner to seek advice from a professional tax consultant or tax attorney for any questions concerning the tax on any forgiven debt as justified by the IRS. The information given on this page is intended for informational purposes only and is not to be used in any other way than with your tax professional.
Both items below will help ease or eliminate the tax implications on forgiven debt of a short-refi or short-sale, if you qualify for the guidelines of the given programs.
IRS form 982 (form 982 pdf). By clicking on this link, you can see the form 982 and instructions. This form is used by the IRS, to ease or eliminate the tax burden on the forgiven debt. In most cases, to use this form, you must prove insolvency at the time of the action. Please inform your tax professional of this form, to see if you fall within the guidelines of the form, to ease your tax burden.
H.R. 3648: Mortgage Forgiveness Debt Relief Act of 2007. This law helps ease the burden of tax implications of a short-refi or short-sale. (Mortgage Forgiveness Debt Relief Act of 2007) By clicking this link, you can see more information on this new law. As with the form 982, it has its set guidelines, but if you fall within the guidelines of this new law, it will also give you relief of tax implications from such situations. Please inform your tax professional of this form, to see if you fall within the guidelines of the law, to ease your tax burden.
Last, is to think outside the box. Here is a scenario for you to take a take a look at. Let's say that at a worst case scenario, you do not qualify for any type of tax relief and must pay the IRS on the forgiven debt, from the result of a short-refi. To begin with, let's say that your home was valued at $300,000 and you owe $300,000, which puts you at 100% LTV (loan to value), with no equity. You then short-refi your home for $200,000, which puts your forgiven debt at $100,000. It is the lender's prerogative to tax you on the forgiven amount. Also, let's say that at the highest tax amount you will be forced to pay is at 28%, which means your tax on the forgiven amount could be as high as $28,000. If you have a short-refi this year, you will possibly be given a 1099 from the lender the following year, which gives you time to get your finances in order and to start straightening out your credit. When it comes time to pay the tax on the forgiven amount, the IRS will allow you to make payments on your taxes if needed. The IRS will charge a small interest rate on taxes owed, when paying on a payment plan, but for the most part, the interest rate is far less expensive than a traditional loan. The plan would be to get your credit back in order, once you have been relieved from the burden of loosing your home and once the short-refi has been completed. Getting your credit back on track and boosting your credit score over the next twelve to eighteen months, will put you in a position to refinance your home with a more traditional refinance with a decent interest rate. When you are to that point, you can then do a refinance with a cash-out option and pay off the tax owed to the IRS, working the tax owed back into your home. At the beginning of this scenario, by performing a short-refi, you have already created equity in your property and by working the tax implication of the short-refi back into your home; you have still created $72,000 in equity in your home.
Will I have to pay taxes on the portion of my loan(s) my current lender(s) “write off” or forgive? You should contact the Internal Revenue Service at 1-800-TAX-1040, or your tax advisor regarding tax-related questions.
Fax Short Payoff
approval to (858) 764-2835 or apply online for
a Short Sale. 
