insolvency question

I hope someone can help me here.

I am in the process of performing a short sale on my home. Just awaiting bank approval and should be closing by end of June. I know there may be a possibility of tax consequences on the difference between the amount I owe and the amount the property sells for.

I know there is a debt forgiveness act that helps with this, however this is not all original purchase money it is refinance money and about 20,000 was taken out to pay off some credit cards. Does anyone know if I will still qualify?

If not I know insolvency is another option. I think it can be proven that my liabilities exceed my assets. Is insolvent something that gets reported on my credit? Is it one a time thing and the IRS forgives me owing the money for that year? Meaning the following year if I am entitled to a refund I will receive it?

I just want to get some advice here b/c I am confused.

Thanks

Based on facts you've given, your transaction won't result in any income tax debt to the IRS for two reasons:
1. It's the sale of your personal residence - I'm assuming there wasn't more than $500,000 worth of capital gains involved.
2. The IRS made a special rule just for you.
http://www.irs.gov/newsroom/article/0,,id=205004,00.html

I did taxes for a couple people who were in this situation. This kind of thing used to only happen in California, but it's everywhere now.

Have a great week!

Can someone help me with this? I just went through a short sale. Hopefully I do receive a 1099C from the banks. I am not sure I will qualify for the debt releif act since I did take some cash out of the 2nd mortgage to pay off some credit cards during a refinance. Everything else went back into the house so I took out about 20k.

Anyhow is insolvenecy hard to prove? Do you need to go to court to do this or is this a simple form you fill out a list your assets? The only real assets I have is a car worth maybe 3,500.00 and some retirement accounts of about 9K. Other than that I don't own anything. Also does filing for insolvency increase my chances of getting audited in the future?

Also as for the 1099c do most banks send it to you for the tax year the debt was canceled? Or can they hold it and send it 2 years down the road?

I'd appreciate any advice on this topic

Giacona,

I am sorry to hear of your problem of insolvency.

This is strange territory for me, but here is someof what I have found.
Take a look at IRS Pub 4681, Canceled Debts, Forclosures, Reposessions and Abandonments for individuals. http://www.irs.gov/pub/irs-pdf/p4681.pdf

Although you did not say you filed for bankruptcy, you may want to see IRS Pub 908, Bankruptcy Tax Guide. http://www.irs.gov/pub/irs-pdf/p908.pdf

Another idea would be to post your question to "Ask Kim" right here at Kiplingers via E- Mail, askkim@kiplinger.com.

I hope this all works out for the best!