Taxes on surrendered home

[jjones227]

I filed bankruptcy and surrendered my house - both mortgages were discharged. Because of the backlog of foreclosures in Maryland, I sold the home in a short sale. Am I responsible for federal and state taxes for this sale? I owed $180K on the first mortgage and $47K on the second. The house sold for $150K.

Thanks

[tobee43]

under the mortgage debt relief act of 2007, which was also extended with this past bill, you are fine with taxes, they are "forgiven". if you get a 1099A ((acquisition or abandonment of secured property), just have you accountant attach a 982 form and you are fine.

as far as state tax, do mean property taxes? also maryland is in fact a recourse (deficiency) state. which, had you not listed both the mortgages on the bk the banks could have gone after you for the deficiency, however, since they were listed and discharged you are "safe".

[LadyInTheRed]

You may be responsible for capital gains taxes (which is a separate issue from forgiven debt discussed by Tobee). The discharge of the debt may lower your basis in the property and result in a taxable gain on the sale. But, the personal residence exclusion from capital gain tax may cover any gain. If you have an accountant file your taxes, make sure they know of the sale and that the debt was discharged in BK. If you file taxes on your own, you'll need to research the issue.

[tobee43]

really lady...capital gains on a primary residence? i think it's up to 250k now??? LOL!! wish i had me one of those i know of no one having to pay on their primary residence lately. i think the 87k is safe from any tax liability as far as reporting any gains. excluding, and with the exception of income property, which is an different story.

again, maryland is a deficiency state, but since the mortgages were discharged prior to the sale the OP should and would not be held accountable for any amount that remained as a result of the sale.

i just don't want OP to miss understand, when you sell your primary residence, you can make up to $250,000 in profit if you're a single owner, twice that if you're married, and not owe any capital gains taxes. i believe that's found under the Taxpayer Relief Act of 1997.

[LostItAll2]

It is interesting that this subject matter came up. Tobee, our attorney said the exact same thing as you said. Thank you for your post, it is very important to give people the correct information. Thank you.

[LadyInTheRed]

really lady...capital gains on a primary residence? i think it's up to 250k now??? LOL!! wish i had me one of those i know of no one having to pay on their primary residence lately. i think the 87k is safe from any tax liability as far as reporting any gains. excluding, and with the exception of income property, which is an different story.

again, maryland is a deficiency state, but since the mortgages were discharged prior to the sale the OP should and would not be held accountable for any amount that remained as a result of the sale.

i just don't want OP to miss understand, when you sell your primary residence, you can make up to $250,000 in profit if you're a single owner, twice that if you're married, and not owe any capital gains taxes. i believe that's found under the Taxpayer Relief Act of 1997.

I don't make any assumptions when I don't have all of the facts. And I always keep in mind when posting here that people with the same question may be reading the information I post. There are lots of people out there who have to worry about capital gains on personal residences. My repeated use of the word "may" was very intentional. So was my suggestion that the OP consult with a tax preparer or do further research on the issue.


ETA, Toobee43, are you familiar with Maryland tax laws? Do you know whether there is a $250k exemption from gains on the sale of residence under Maryland's tax laws?

[tobee43]

yes, in maryland it appears to be the same. it's 250k (single) and 500k (married) on a primary residence, as i find nothing to the contrary. also to avoid capital gains taxes you must live in the house as your primary residence for two of the last five years, and the capital gains tax rates are determined by the type of investment asset and the holding period of the asset.

really...in addition to the federal income tax, all states except alaska, forida, nevada, south dakota, texas, washington, and wyoming have a state income tax. however, new hampshire and tennessee tax only dividend and interest income. state income tax rates are generally much lower than the federal income tax rates, but california, hawaii, minnesota, new york, north carolina, and wisconsin have the highest state income tax rates. if one's accountant understands and knows how to utilize the how to adjust ones' costs basis, no capital gains would or could be realize with such a small amount which we are speaking about here.


however, if you that gain is realized via a short sale and has been listed on the bk petition and discharged, i am hard pressed that there are or will be any tax ramifications. i am only aware of those that have sold property in maryland but were not residents of the state.

there are presently some current bills pending in maryland that can change the capital gain tax schedules, however, it really has to do with the most wealthly. which boast some of the wealthiest people in this country. here's just one of the pending legislation...not passed as of this date and is really only for the those making the highest of income, and really would not be applicable to the OP.


" A Montgomery County lawmaker has introduced legislation that would impose a special state tax on Maryland residents' capital gains.

The proposed taxes would have a heavy impact on small businesses and counties such as Montgomery, Howard and other jurisdictions with some of the highest incomes in the country.

The legislation, introduced by Democratic Del. Ana Sol Gutierrez and a host of lawmakers from Prince George's County and Baltimore, would charge an additional 2 percent tax on capital gains -- profits on the sale of stocks, bonds and real estate investments -- filed as a part of residents' taxable income.

For Maryland's highest-earning residents currently paying a 5.5 percent income tax rate on capital gains as well as income taxes -- part of the so-called "1 percent" Gutierrez said the bill targets -- the increase to 7.5 percent would raise taxes on investments by roughly 36 percent.

Small businesses with net capital gains also would see an increase in their income tax liabilities, according to state officials.

Gutierrez's bill would have the greatest hit in her own county, as well as Howard, Calvert, St. Mary's and Charles counties, all of which are ranked among the 15 richest counties in the country, according to the website Main Street, which compiled its list using 2010 census data.

"You're adding 2 percent just for the privilege of having invested in another company. So your tax rate goes up for doing the American thing and investing in another company," said Dee Hodges, president of the Maryland Taxpayers Association, which lobbies against new taxes.

"It's just another way of the state reaching into our pockets without doing anything for taxpayers," she said.

The capital gains tax would generate at least $211 million in revenue for the state in fiscal 2013 after taking effect in July, according to the state Department of Legislative Services -- far more than the $75 million that would be raised by the proposed millionaire's tax.

Maryland has the highest concentration of millionaires in the country -- 7.22 percent of the state's households, according to a Phoenix Marketing International report.

Gutierrez said her tax proposal was a fairer approach than Gov. Martin O'Malley's proposal to raise income taxes on earners making more than $100,000, a move a state budget analysis found would add an average of $334 more in taxes annually to 32 percent of Montgomery County taxpayers.

Montgomery County officials have derided the governor's tax plans and other tax increases for placing too much burden on its residents while the county has little to show for the tax dollars it provides the state.

"Montgomery County is the economic engine of the state of Maryland," said County Council President Roger Berliner. "It is my hope that the state will recognize that. ... We need a vibrant county and the rest of the state needs our county to remain vibrant."

staying on subject here. jjones, i simple call to your account should clear any doubts you have with respect to any tax ramifications you may or may not have. i'll be voting for none.

[LadyInTheRed]

Tobee, I think you missed my point.

[tobee43]

just point me there LOL! i most likely did...you know i get lost. just put be back on the road please.

[justbroke]

As suggested, I would have a professional tax preparer or accountant do your taxes this year. As LITR stated, certainly mention that it was a short sale, you had surrendered in bankruptcy, and the debt was discharged in that bankruptcy. You may also be able to use IRS Form 982 to remove the tax attribute and not be taxed on the unrealized "gain" due to the 1099-A/C that you may or may not receive.

In general, any transactions where there are "large" capital gains, realized or not, I would not leave this to TurboTax or my own thoughts on the subject.

[tobee43]

haaaa turbotax...now that scary.

i think the point here the OP is concerned about is the tax ramifications, of the short sale at hand, and while is best to always consult an accountant with the tax issues, one would be surprised how little many know about these situations.

[justbroke]

If a CPA doesn't know anything about the affects of bankruptcy, Form 982, the various foreclosure forgiveness acts, etc... then, perhaps, the person should be using a different accountant (CPA). I had an issue where I was using H&R Block's professional tax office (for business filers), and the person messed up on some NQSO (non-qualified stock options). After I pointed out the error, I was told I should have gone to their "other" office, even though she worked for that "other" office.

Unfortunately mistakes are made, but if a taxpayer at least advised their tax preparer/accountant of the various "events" which occurred in that year beforehand (such as bankruptcy, short sale, foreclosure, installment sales, NOL, etc), there may be fewer problems.

[tobee43]

i know a few cpa's in business well over 20 years and much of this is new to them. remember, this really has never happened before. for that matter even figuring out cost basis for capital gains are a difficult task for many accountants. if you can pay for the accountant that is up on everything happening out there, then most likely one would have had ample warning of what to expect and what to do all along the way.

short sales and such are not the norm for most accountants, although, i would say today they are working more with them than a couple of years ago. the only reason i say that with such conviction is i have one sitting right here!!! (actually on the phone with me since we are discussing another unexplained UAOs...sort of like a UFO but in the accounting field). LOL!!!! and, i have to say he USE to be really good, or so i thought LOL! just kidding!!! he still is great! but has been experiencing many new situations from his clients.

[justbroke]

Aren't CPAs required to do continuing education? Shouldn't they be up to date on tax law if they are preparing tax returns? (Unfortunately, Florida doesn't seem to be as stringent as other States!)

Maybe the tax code is just too complex.

[tobee43]

Aren't CPAs required to do continuing education? Shouldn't they be up to date on tax law if they are preparing tax returns? (Unfortunately, Florida doesn't seem to be as stringent as other States!)

Maybe the tax code is just too complex.

one would think they are suppose to. things are changing so quickly many are not keeping up and that is the unfortunate truth. if one is lucky enough to have an accountant that is up on all the changes taking place, that is one lucky client.

ha! i can tell you stories with some i work with that i really thought were on top of it only to find out, (one case we have to do 20 years of amended returns why? the very brilliant accountant did really brilliant mistakes for years upon years)...need i say more! some just get complacent, while others just ride through because they get lazy. just from those i see and work with, i'm not speaking about all accountants not knowing what they are doing. there are many excellent accountants out there, usually the ones that locate their cars in the parking lot without having to put a blue or red flag on their mirror ( I LOVE MY ACCOUNTANT!)

also, remember, most returns are the same old same old...thousands of them. it's usually just those few that knock them down, but they are now beginning to turn up more and more frequently. presenting more challenges for certain.