subject: Phantom Income In Short Sales [print this page] Let us discuss the phantom income in short sales. Do you have any idea about the meaning of phantom income? The phantom income is defined as the difference between the selling price of your property and the amount that you still have to pay on your loan. It is the amount on your loan that you still have to pay but has been already waived.
The short sale, on the other hand, is defined as the amount that you will get if you sell your property minus the balance in your loan. It means that with short sale, even after selling your property the amount that you will make is not enough to pay for your mortgage. But, the lending company can opt not to make you pay for the remainder of the loan anymore. Of course, even if the loan is waived, the debt would not be removed because you did not pay for it. This would result negative record on your credit standing.
Under certain circumstances, even though you don't receive the difference between the loan amount and the amount you sell your property for, you may have a tax obligation which could be substantial. How so? This is because the internal revenue service sees the remaining debt as an amount that has been completed; hence it will be counted under income. This is the reason why it's called phantom income - you don't earn anything but it is counted as amount earned.
Now, if you sell your primary residence under a short sale, you will not have phantom income at this time. The internal revenue service made a change in the law several years ago so that when you sell your primary residence, you will not have any additional income tax obligations if you sell your house for less than the mortgage amount.
This, however, is not true with regard to investment properties. If you sell investment property for less than the loan amount, you will have a tax obligation which will be equal to the difference between the sell price and the loan amount. Keep in mind that your tax obligation is only waived from the sale of your primary residence and not for sale of any other property. It is important that before you sell either your primary residence or any investment property that you consult with your tax adviser so that you are fully aware of any potential adverse tax consequences. Being knowledgeable about the consequences of your sale is important so that you won't be held up by legal problems in the future.
