George — As you know in the nearly two years I have been working as the lead attorney for The Short Sale Negotiator, taxes are one of the biggest considerations people faced with losing their home fret about. Like all situations, a client should never let the tax tale wag the dog. Ever since I graduated Georgetown University Law Center and Graduate School of Business, I have been highly involved in personal income tax from my half decade experience at the National Tax Office of KPMG and my near decade experience of running Tucker & Associates, PLLC, a full service real estate and tax law firm.

Essentially, the IRC mirrors the Section 121 requirements for mitigation of tax loss on Cancellation of Indebtedness Income. In other words, if you have met the 24 out of the previous 60 months occupancy requirements as a married couple your first $500,000 in debt ($250,000) is forgiven, much like your first $500,000 in capital gain would be excluded from income.

Clearly, for investment properties or second homes it is a different story. However, what we do at Tucker & Associates, PLLC, in conjunction with the Short Sale Negotiator is examine the complete picture to help assess the clients situation. Perfect example, we helped a charming couple short sale their investment property last week. They were concerned about the 1099-C they would receive from their lender for the $165,000 of debt we got them relieved from with no personal recourse. However, I reminded them they had substantial improvements which were basis additions to their property which helped their situation — in fact it is easiest to examine the numerics:

House Purchased for $650,000
20% down Payment $130,000
Loan $520,000
Lender Received $355,000 on Short Sale

The popular press, myths men, and some of the hucksters out there led them to believe they would have a $165,000 of ordinary income on their 2009 taxes! WRONG. Their basis was $650,000 the $130,000 they already lost (their hard earned down payment), would be netted out of their tax calculation. Additionally, they had receipts and bills for a $40,000 finished basement. Hence, they actually had a capital loss (since it was a transaction entered into for profit – an investment property) of $10,000!

Additionally, if you qualify as a real estate professional, meaning the majority of your income is earned in the real property trade, this loss would have been ordinary, and come straight off the top.

At Tucker & Associates, PLLC and the Short Sale Negotiator we not only level the playing field, we empower you with the knowledge to get your life back on track. Never believe that foreclosure or bankruptcy is a better option – you have two viable options – loan modification or our Hybrid Refinance if you want to stay — short sale if you rather go. Best of luck, remember knowledge is power!

Lawrence Tucker, Esquire, MBA, guest blogger.
Principal Attorney, Tucker & Associates, PLLC.

Submitted on Wednesday, October 29th, 2008 at 2:52 pm