Foreclosures and Short Sales

Foreclosures and Short Sales - Josh Keeder Professor...

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Josh Keeder Professor Jackson Tax Accounting Foreclosures and Short Sales Introduction: As the nations economy continues to struggle, the risk of foreclosures and short sales are at an all time high. The housing market not being where it needs to be, the high prices have caused families to leave their homes behind due to a foreclosure with the possibility of having to report a gain on a person’s tax return because a foreclosure is treated as a gain. The other risk is in the event of a short sale on a person’s property. This causes the sale to be taxed as ordinary income and reported on form 1040. In these two instances there has been major debate on whether individuals or families should be taxed on either the foreclosure of their home or selling it below the fair market value with a short sale. Applicable Issue: Stated in the Internal Revenue Manuel, “A foreclosure is the process by which an owner's right to a property is terminated, the foreclosing party's interest is liquidated, and junior creditor interests on the property are extinguished.” Where as short sales are “a house sale where the sales proceeds are not enough to pay off the mortgage.” (Forbes) These two instances have become a major topic due to the stand still in the economy and causing many tax problems for homeowners. Homeowners are at a loss on whether they’re any tax implications they need to follow if one of these two events occurs. In the event of a foreclosure where the owner is losing his house to the bank or lending company there is still a selling price used for tax purposes that isn’t clear making it hard to for the owner to report any income. (Perez) The Mortgage Forgiveness Debt Relief Act and Debt Cancellation in 2007 made short sales easier for people to understand as a loss from a short sale would be excluded in gross income. (Publication 550) It is still a
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  • Fall '13
  • jackson
  • Accounting, Taxation in the United States, short sales, short sale

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