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Reporting short sale as cancellation of debt. How does that work if not married?

Sacramento, CA |

My boyfriend and I purchased a house and we have done a short sale. Will we both need to report this as a cancellation of debt since we are not married, or is it just one of us?

Attorney Answers 3


Since you are not married you will both file your own individual income tax returns. If you each own a 50 percent interest in the home, then you will each pick up your share of the cancelled debt, or half. However, this could change if you have different ownership positions. If this was your personal residence, then the cancelled debt income may not be taxable. There are other exceptions that also apply. Have a tax professional prepare or review your returns to make sure you report this correctly.

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.

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If you're not married, then both of you are filing tax returns separately, and you each need to see a CPA to make sure you're reporting this correctly.

Disclaimer: Please note that this answer does not constitute legal advice, and should not be relied on, since each state has different laws, each situation is fact specific, and it is impossible to evaluate a legal problem without a comprehensive consultation and review of all the facts and documents at issue. This answer does not create an attorney-client relationship.

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Generally, if you are unmarried the property if held jointly would be as tenants in common. In such case each of you would report one-half of any income that is required to be reported. Before you recognize cancellation of debt income, be aware that if you are insolvent after the discharge you have no taxable income. There is a second exclusion called qualified principal residence indebtedness (QPRI) for discharges before 1/1/13 which allows for up to a $2 million dollar exclusion. To meet the QPRI you must meet 3 parts: (1) the debt was used to acquire, construct or substantially improve a residence (2) the debt is secured by that residence and (3) the residence is used by the borrower as his or her principal place of abode fro two out of the five recent years. You should sit down with a good tax attorney or tax accountant to go over these exclusions.

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Mr. Fromm is licensed to practice law in PA with offices in Philadelphia and Montgomery Counties and services clients throughout the state of Pennsylvania. He can be reached at 215-735-2336 or at the email address listed below. He is rated as an AV Preminent attorney from Lexis-Nexis Martindale Hubbell having the received the highest possble rating in legal ability and ethical standards. In addition, he has received a 10.0 rating from AVVO and recently was featured as a 5Star Wealth Manager in the Philadelphia Magazine, November 2009 issue on page 123.
Mr. Fromm is ethically required to state that the response herein is not legal advice and does not create an attorney/ client relationship. Also, there are no recognized legal specialties under Pennsylvania law. Any references to a trust, estate or tax lawyer refer only to the fact that Mr. Fromm limits his practice to these areas of the law. These responses are only in the form of legal education and are intended to only provide general information about the matter within the question. Oftentimes the question does not include significant and important facts and timelines that if known could significantly change the reply or make such reply unsuitable. Mr. Fromm strongly advises the questioner to confer with an attorney in their state in order to ensure proper advice is received.
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