The US model of ‘short sales’ has a hidden sting in it that often gets lost in the noise, namely that the reduction of your debt is often considered a gain and it needs to be reported on your IRS Form 1099 (as opposed to a W2 or 1040) which covers income outside of wages/salaries/gratuities.
Which means that if you sold your property (we’re assuming it is in negative equity) for a €50,000 loss and the bank write that off, that in effect you have a non deductible loss which you didn’t pay and therefore you pay the tax on it (their equivalent of capital gains).
Like the US, Irish investors can offset capital losses against capital gains, in the case of your own home this doesn’t apply. In the American example a write-down creates a tax liability, although not in every state (my home-state of California being an example). This was becoming such a problem that the IRS brought out two special tax codes called ‘The mortgage forgiveness debt relief act & debt cancellation act of 2007’.
Is there any similar provision in Ireland? No…
Is that a problem?… No.
Because the Capital Acquisition tax & tax consolidation act 2003 have no provision stating that a debt write-down constitutes a gift or gain on a commercial agreement carried out at arms length.
Thankfully there is no lacuna, the recent Bank of Ireland debt write down case would be an example to prove the point. If this had happened in the US and the above acts were not in place there would be a CGT implication of c.15% (long term band) or about €22,500!
it is worth remembering that there are aspects of ‘the American way’ that we don’t consider when seeking to embrace their model of ‘short sales’.