Handing Over The House

Mark and his wife went through a short sale and have to pay the difference on the house. They can pay the remaining amount to the bank or claim it collectible income. Which should he do?

QUESTION: Mark in Oklahoma and his wife just went through a short sale and have to pay the difference on their house. He didn’t negotiate the short sale to where he can just walk away. He can either pay the remaining amount to the bank or turn it over to the IRS as collectible income. Which should he do?

ANSWER: I’d be happy to turn it over to the IRS. That means they are saying if they forgive the debt, then the IRS is going to be sent a 1099. Debt forgiveness is taxable income. However, on your personal residence, it’s not in most cases. They are welcome to turn it over to the IRS on a 1099, and I’ll be happy to file the 1099 as part of my taxes.

If you originally paid $275,000 for the home, and the mortgage amount that was on there when you did the short sale was $310,000, you may have some taxes on that difference. The rest of the forgiveness is not taxable. But check with your certified public accountant on that.

If you can walk away from the mortgage company owing nothing, and only having some taxes on some of the amount, then that will be your best way to go by far. It hammers your credit pretty badly, so you’re probably looking at three years before you can buy a home again.

If you get yourself completely out of debt and let your credit score go to zero because you don’t borrow money, you may get into a home quicker than that if you have a stable job and a good down payment.

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