I own a home in AZ, lived in the house for 4ys and made it as a rental property.I want to short sale the property because of financial hardship.I've 1st and 2nd mortgages on the house, 2nd mortgage is also taken at the time of buying the house(80-10-10).Will there be any tax implications if i short sale? If so what kind?
You will have income from debt relief (canceled debt) if you do not pay back the entire amount you borrowed. If this is not your principal residence this amount will be taxed as ordinary income, unless you meet an exception. The exceptions are that this is non-recourse debt, you are bankrupt, or you are insolvent.
Any individual seeking legal advice for their own situation should retain their own legal counsel as this response provides information that is general in nature and not specific to any person's unique situation. Circular 230 Disclaimer - Advice given in this response cannot be used to eliminate penalties with the IRS or any other governmental agency.
The short answer is that you will have income. However, if you are insolvent as determined under Section 108 of the Internal Revenue Code, then the forgiveness of indebtedness income will not create income for tax purposes.
Nothing construed herein shall create an attorney client relationship. You should not rely on anything set forth herein as constituting legal advice nor can you rely upon anything stated herein for penalty protection against any taxing agency.
Since your debt is being forgiven, this is considered income to you. Since the debt is not related to your primary residence, but rather an investment property, the income will be taxable. There are exceptions in cases of insolvency, as my colleague pointed out, but it doesn't sound like you would meet that exception based on the limited facts you presented. You should consult with a tax attorney to review your situation.
THESE COMMENTS ARE NOT LEGAL ADVICE. They are provided for informational purposes only. Actual legal advice can only be provided after consultation by an attorney licensed in your jurisdiction. Answering this question does not create an attorney-client relationship or otherwise require further consultation.