Q: I owned three properties. Because of the economy, I moved out of my home (putting it up for sale) and into one of the apartments in a multifamily property I own.

After two years of wrangling with the first and second lenders on my home, we closed the short sale last week. Now it feels like I can get on with my life.

But as I’m trying to plan out my bills and finances going forward, I realized I’m not sure whether there are any property taxes I’m responsible for on the house that just sold. I had fallen behind on them. Will I be getting any sort of paperwork or anything for my taxes from the banks? –J.C.

A: Congratulations on closing that short sale — it’s not an easy thing to do, and it appears that you exhibited a great deal of patience and a bit of a tough time in the process. Here’s to getting back on your feet!

In terms of the back property taxes you owed on that home, you should be free and clear of them going forward. Governmental property taxes convert into a lien on a property as soon as they are due — even before they fall behind, in most areas. That just means that your escrow provider and/or title insurer have to clear those tax liens, making sure they are paid up to the date of closing, before they are able to transfer clear title to the buyer.

In the average short-sale situation, what happens is that the seller’s bank(s) has to direct some of the proceeds of the sale to covering any back taxes on the property, agent commissions, transfer taxes and such before they can apply the rest of the sale price to cover the outstanding mortgage balance(s). When escrow closes, and I mean starting the day of or the day after, the buyer is responsible for property taxes incurred from that day forward.

In some transactions, though, there are back expenses that are not extinguished by a short sale.

The most common are homeowners association dues that are not paid off or waived in the short sale. Some HOAs will continue collection efforts on back dues — not as a lien against the property under its new ownership, but as a personal debt of the former homeowner.

The other are second or even third mortgages in which the lender expressly agreed to let the short sale go forward on the condition that the seller or former homeowner pay some or all of the outstanding balance over time.

Fortunately for you, it doesn’t sound like either of these apply in your situation; if you continue to owe your second lender, it would be pursuant to an agreement you signed with them, so you would be aware of that obligation.

Now to the question of paperwork. At or just after closing, depending on where you live, you should receive a document on legal-sized paper called a HUD-1 closing statement. As with any real estate transaction, hang on to that just in case you don’t get any additional paperwork from your lenders.

To the extent that some portion of your mortgage balances were forgiven by the banks, that gap — that deficiency — is normally subject to income taxes. It’s called cancellation of debt income, or CODI.

This sort of "income" (essentially a loan that was forgiven) is usually documented by the bank sending you a Form 1099-C, in January — just as if you’d earned that income. So, you might see two of these statements in the mail early next year.

I say "might" only because some of the mortgage lenders that are no longer operating as banks or lenders aren’t sending these statements out anymore. In that event, your HUD-1 might end up being the only documentation you receive.

But because you managed to close this short sale when you did, chances are good that you’ll be exempt from income taxes on your CODI "income" under the Mortgage Forgiveness Debt Relief Act of 2007. The act applies to qualified principal residence indebtedness forgiven in calendar years 2007 through 2012.

You’ll still need to let the IRS and your state tax agency know of your short-sale specifics, but you’ll be able to invoke the terms of the act (most states now have parallel provisions) to avoid being charged with income taxes on the forgiven debt, assuming the home was actually your primary residence, your mortgage debt was $2 million or less, and certain other guidelines are met.

Visit this dedicated page on the IRS website for more details, and best of luck on your personal financial recovery endeavors.

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