Are short sales allowed on commercial and investment properties?

Are short sales allowed on commercial and investment properties?

A short sale can be conducted on any type of property. If the seller owes more than the property is worth, and the mortgage lender is willing to take less than what is owed, then a short sale can occur. Short sales can occur with one’s primary residence, a vacation home, a commercial property, a multi-unit property, or vacant land.

In any short sale, if the mortgage lender forgives the remaining debt, the former borrower can expect to receive a 1099 form the following January. The forgiven debt will be reported to the Internal Revenue Service. If the property was an investment property, second home, vacant land, or a commercial property, then the former borrower will likely have to pay some tax on the forgiven debt. The IRS has historically treated forgiven debt as ordinary income.

If a person sells their primary residence via a short sale, they may not have to pay any income tax. The Mortgage Forgiveness Debt Relief Act of 2007 applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, may qualify for this relief. In most cases, eligible homeowners only need to fill out a few lines on IRS Form 982.

The debt must have been used to buy, build, or substantially improve the taxpayer's principal residence and must have been secured by that residence. Debt used to refinance qualifying debt is also eligible for the exclusion, but only up to the amount of the old mortgage principal, just before the refinancing. 

Source: Significa