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Can I file for bankruptcy to avoid paying the taxes on a short sale?

San Diego, CA |

My house is worth 480K. I owe 570K on the 1st and 82K on the 2nd. I am planning to modify the loan but if it is not a good modification and I decide to short sell the house. I will be receiving a 1099 for 172,000 for the difference and pay taxes. Can I file for bankruptcy or foreclose or do both to avoid paying the taxes? Please advise.

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Attorney answers 1


A bankruptcy filing would eliminate any tax liability on the short sale and in my view is the way to go if you are in fact facing a 1099 for $172k. You will be required to pay income taxes on this forgiven debt at your current tax rate. Considering an average tax rate of 20%, you are looking at over $15k in liability here. Form a practical standpoint, however, if you are considering filing bankruptcy then there really is no need to go through the long stressful process of a short sale since the bankruptcy would eliminate the debt whether you short sale or not. If your loan modification does not come through as you had hoped please consider giving me a call to discuss what options are best for your current situation.

Mr. Larkin is licensed to practice law in CA and is located in San Diego. His response here does not constitute legal advice and does not create an attorney/ client relationship. The response is in the form of legal education and is intended to provide general information about the matter in question. Many times the questioner may leave out details which would make the reply unsuitable. Mr. Larkin strongly advises the questioner to confer with an attorney in their own state to acquire more information about the specifics of their case.