Tax Break for Short Sales to Expire in December

In 2007, the Mortgage Forgiveness Debt Relief Act was passed, allowing homeowners whose banks forgive the unpaid mortgage debt after a short sale, principal reduction or foeclosure, not to count that money as income on their tax returns.  With the act scheduled to expire December 31, 2012, accountants and realtors are urging homeowners considering a short sale to put their properties on the market now.

The potential repercussions of delaying a short sale till after the end of 2012 include paying taxes on your forgiven debt and the possibility of being pushed into a higher tax bracket, due to the increased “phantom” income.  The average person cannot afford taxes on a large amount of additional income – an amount that typically exceeds the homeowner’s annual earned income.  For example, John Smith, who earns $55,000 in salary, short sells his home for $100,000, but owes $175,000, and his lender forgives the $75,000 difference.  If the short sale occurs in January 2013, John Smith’s taxable income for 2013 is now $130,000 – at a higher tax rate.

In March, a bill was introduced to extend the debt relief act through 2015.  It has not yet been passed.  Many believe the bill must be passed in order to allow continued housing and economic recovery.  The question is, can Congress overcome their political polarization to enact what seems like common sense to the public.

It is important to note that the existing act, and its potential extension, apply only to forgiven debt on principal residences and up to $2 million ($1 million if married, filing separately.)  The protection does not apply to second mortgages that were used for non-household expenses.  Other tax rules may also apply, but any level of tax relief is beneficial.

Living in Sarasota March 2020

Living in Sarasota March 2020

Living in Sarasota, September 2019
A publication of S&N Real Estate, Inc.

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