Does a short sale in a bankruptcy incur a tax liability

Asked almost 5 years ago - Youngstown, OH

My bankruptcy lawyer says do not short sale because of a tax liability. The bank says there are new laws that allow a short sale in a bankruptcy without incurring a tax liability and the lawyer is not up on the change. The bank is telling me they are bot pursuing a forsclosure because the property is not worth it and that the town is giving the property fines and fees. They say I am responsible as the owner of record. The bank has paid property taxes and insurance as the case has gone through the courts but now wants to stop so that I am responsible to pay these fines. Does any of this sound correct? I live in NJ and the property is in OH

Attorney answers (1)

  1. Justin B. Hopkins

    Contributor Level 7

    Answered . The problem is either could be correct.
    It would depend on a few factors.
    1. Was it an investment?
    If yes, then E is out.
    Are you in Chap 11?
    Are you insolvent.
    This is the trickiest one, you can be bankrupt but not insolvent.
    Insolvency is usually set by state law.
    Here is the law:

    (a) Exclusion from gross income
    (1) In general
    Gross income does not include any amount which (but for this subsection) would be includible in gross income by reason of the discharge (in whole or in part) of indebtedness of the taxpayer if—
    (A) the discharge occurs in a title 11 case,
    (B) the discharge occurs when the taxpayer is insolvent,
    (C) the indebtedness discharged is qualified farm indebtedness,
    (D) in the case of a taxpayer other than a C corporation, the indebtedness discharged is qualified real property business indebtedness, or
    (E) the indebtedness discharged is qualified principal residence indebtedness which is discharged before January 1, 2013.


    This communication does not establish an attorney client relationship, which can only be established by a signed retainer agreement.

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