Tax issue
I did a short sell on a home in 05', thinking the was the right thing to do. In 07' I recived a letter from the IRS stating that the mortgage company sent in the difference of what they sold the home for and what I owed as a debt write off and I now owed over $8000 in taxes and penalties. My question is, is that legal since they took over the sell of the home, sold if the price they agreed and informed my in a letter that had it sold at higher then what I owed, I would not be entitled to the profits. It would seem it would have been better to let them forclose. I thought I had them paid off in September 08' but received a letter in October 08' that I now owed an additional $2300. Is there a way to dispute this and get back the money I have paid and the money that they will keep this year of my refund?
1 Answer from Attorneys
Re: Tax issue
Unfortunately, a lot of people are finding out that when you pay less than the full amount of a debt you owe to a financial institution, you may incurr "discharge of indebtness income". Basically, when you borrow the money, it is not income to you at that time because you have to repay it. If, at a later date, you pay less than the full amount due, the lender suffers a loss and under tax law, you recognize a gain equal to the difference of what you owed and what you paid. Congress has passed a law making an exception to this rule if the house was your personal residence.
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