Beware of taxes in distressed sales

Home Sale Hindsight

Q: Last year was really hard. I got laid off, and we ended up short-selling our home. We thought we were fortunate because we didn’t end up with the foreclosure on our record, so we’ll be able to buy another home in two years instead of five. We knew the IRS wouldn’t tax us on it, under that temporary law.

But I just did my taxes and we actually owe the state more than $25,000 in income tax because of our short sale. We thought we were doing the right thing by not just letting the house go, but it looks like we’re going to be penalized for that after all.