Relocation Assistance After Short Sale Taxable To Former Homeowner

Q: Last year, I had to do a short sale on my home. My lender gave me $3,000 in “relocation assistance” payments.

I’m now doing my taxes and I would like to know whether “relocation assistance” payments are taxable to the homeowner. This payment was made in connection with a mutual agreement between the mortgage company and myself, the homeowner, agreeing that the homeowner will vacate the home in good condition.

Thank you for your response.

A: Recently on my Sunday morning radio show, Mark Teytel, a foreclosure and short sale broker based in Atlanta, shared that one of his clients had received a $20,000 “relocation assistance” payment for a property that had been sold as a short sale.

There was an immediate response to this on-air conversation. Many listeners were outraged that a family would receive such a huge payment just to turn over the property in good condition.

I wondered what the tax implications of such a payment would be – which, by the way, was the largest one I had heard of. Most of the relocation assistance payments have been in the range of $1,000 to $3,000, depending on the price of the property.

I asked Bill Nemeth, an enrolled agent who is president of the Georgia Association of Enrolled Agents (4GAEA.org) to weigh in. He told me that he has seen more of these payments come through his office, and unfortunately, the payments are taxable.

“I have heard this program called by various names but the catchy one is ‘Cash for Keys’,” Nemeth said. “The income is taxable – It goes on Line 21, Other Income, on Form 1040.

I know that’s not what you wanted to hear. The bank will send you a 1099 for the payment as well as a 1099 for the difference between what the property sold for and the amount you still owe on the mortgage. While there won’t be any tax implications for you on that second amount (provided the property was your primary residence), you will have to pay taxes on the $3,000, which the IRS says is income.

For more details, please consult with your tax advisor.


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