Many people have asked me recently: How do I report my property when I’ve had a short sale or foreclosure? There’s no easy answer, even though there’s a lot of information out there, for sure. But even true professionals don’t know how to handle foreclosures in a tax-return situation correctly.
For example: I told a client to go to someone else this year, because they said that they had sought a second opinion and believed that I was wrong. I had gone to a seminar prior to this incident, along with one of my staff bookkeepers, and we heard this client’s exact example, almost verbatim, spelled out. And the answer? We were right, according to the expert teaching the course.
At the end of the day, there are people out there who just don’t understand the consequences of short sales and foreclosures when it comes to your tax return. Was the property a rental? Your personal residence? Was the debt recourse or non-recourse? A personal residence that you borrowed money against or refinanced? There are so many variables that can affect how the property is reported in your taxes—and each time one of those variables changes, it changes the outcome.
Each and every time we help a client with their tax return and they are reporting a short sale or foreclosure, it’s a different return. There is no template to these types of tax returns: Every single one has different variables that need to be explored, followed up on and reported properly. And, depending on the facts and circumstances, you might find that you receive a tax refund because of a deductible loss.
You definitely need professional guidance when you are reporting a short sale or foreclosure in your tax return, no question about it. Frankly, you would be crazy to do it yourself, and you will most likely be asking for an audit.
And it’s not clear if the IRS will audit you because the return is blatantly wrong, or if all of the attention surrounding bad lending and the housing markets will capture the auditors’ attention—we don’t know how this will pan out over the next few years. They’ve just started sending out auditing notices for 2009, which is really when the foreclosure crisis hit, and it won’t be until the end of this year when we’ll find out how the IRS decides to deal with these foreclosure/short sale tax returns. Keep an eye out on our blog for further information on this subject, one that will not be going away for a while.
But, as always, wouldn’t you rather have your tax return correct rather than take a gamble? Protect yourself from further financial distress by making sure you report that foreclosure or short sale correctly. That process is a stressful one, to say the least, and the last thing you need is to have that stress resurrect itself down the line, just as you’re getting back on your feet.
But if you are bound and determined to do your tax return yourself, then do us one favor: Call a licensed CPA and arrange a one-hour complimentary consultation. We provide these for potential clients, and in this situation, that one hour could help you understand what you’re getting yourself into.
If you still have questions about your tax return, foreclosure or not, please give Simons Accountancy a call at 714-637-4552, or fill out our online contact form here http://simonscorp.wpengine.com/contact-us/. Take the tax-time stress out of your life and make sure your taxes are done right—we can help.