Northern Virginia Cash-Out Refi's May Not Be Eligible for Mortgage Debt Relied in a Short Sale. If you are a short sale seller that has taken cash out in a refi, you need to consult a tax professional immediately. If your short sale is approved and your mortgage holder sends a 1099 to the IRS, you may have to pay taxes on the cash-out portion of your refinance.
On the IRS website, where the Mortgage Debt Relief Act is defined, it clearly states that:
The Act applies only to forgiven or cancelled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes.
When refinances are specifically addressed, the answer is:
Debt used to refinance your home qualifies for this exclusion, but only to the extent that the principal balance of the old mortgage, immediately before the refinancing, would have qualified.
The implication being that if you did a cash-out refinance, and used the cash to buy a car, boat, or travel around the world, that cash-out amount would be exempt from the Mortgage Debt Relief Act.
The Mortgage Debt Relief Act also only applies to principal residences. Investors will have to look to their tax professional for advice on how to handle a 1099 in a short sale or foreclosure of investment property.
ANY ONE FACING A SHORT SALE NEEDS TO CONSULT WITH A TAX PROFESSIONAL.
Chris Ann Cleland, Associate Broker- Licensed in Virginia, GRI, SFR, Northern Virginia Short Sale Specialist. Affiliated with Long & Foster, 7526 Limestone Drive, Gainesville, VA 20155. To contact Chris Ann, call 703-402-0037 or email chrisann@LNF.com. Or you can visit her website: www.nvarealestate.net.
Header is a combination of photos from the Bristow, Gainesville & Haymarket areas, taken by Chris Ann Cleland.
Hi Chris, Yes this is very important. i agree, anyone thinking about doing a short sale, should consult with a tax professional. That is a great idea. thanks for sharing
Ginger: Attending yet another short sale seminar in the past two weeks I learned about this cash-out refi exemption from the Mortgage Debt Relief Act. I know there are going to be a lot of angry short sale sellers out there come tax time who didn't consult with a tax professional.
Chris - Man! that would make anger management difficult if you did not know this...especially because how smoothly short sales in this market transpire. Thanks for the heads-up.
Chris Ann...
Oh wow, this is really important information ... a lot of folks out there may be facing a tax liability!
Chris Ann - Thanks for sharing your knowledge with us. Very important information.
Chris Ann
In the back of my mind I knew this and had forgotten. Back in the 80's we had the same problems in some commercial deals where the mortgagor was able to walk away from some debt. IRS said NO.......you owe.
Claude: Having a good tax attorney or professional on hand to send folks to is a must.
Richard: A few clients that I have seen thumb their nose at short sales and opt for foreclosure will be facing this. Cash out amounts were asked to repaid in full or by a certain percentage and the sellers refused. 1099's are not exclusive to short sales.
Sharon: In the world of short sales, you learn something everyday.
Trey: I don't know where people get the idea there are do-overs for backing out of a mortgage. And with the cash out refi's....making off with the money...it's stealing. At least we know that the IRS doesn't mess around with tax evasion.