Fortunately homeowners do have options:
1. Chapter 11
2. Prove Insolvency- Show that their debt is greater then their assets
3. Primary residency exclusion.
The first two are self explanatory the third option, Primary residency exclusion requires more explanation.
When a home is short sold and the lender issues a form 1099-c (cancellation of debt Income) for the amount forgiven to the homeowner; it is considered income.
However, if it was considered their principal residence for at least 2 years within the 5 year period prior to the sale then they can exclude up $250,000 of a gain from that sale for their taxable income. The exclusion is $500,000 for married filing jointly.
Calculate the gain/loss by figuring their cost basis of buying the home plus any improvements and subtract that from the selling price.
If you have questions feel free to give us a call at 561-624-9422.