Tax implications still up in the air!

We often get asked what the tax implications are for a seller when doing a short sale on their home.  It’s always best to ask your  tax questions to your Certified Public Accountant that knows your circumstances, and I am not a CPA, however here is some general information that may be helpful.

A short sale is created when a homeowner is looking to sell their home but the current market value will not allow them to get a purchase contract full paying off their mortgage.  Additionally, their own personal  situation (hardship) does not allow them to pay off this balance themselves at the closing.   For example,  the homeowners mortgage is for $350,000.  Out of the closing there will be $300,000 to pay the bank after all the closing expenses are covered.  We work to get a short sale approval from the bank that allows the closing to take place, the bank accepts the $300,000 and the deficiency on the mortgage of $50,000 is forgiven.  This forgiven debt is considered income by the IRS and the bank will issue a 1099 at the end of the year to reflect the forgiven debt.

Originally signed into law in December 2007, The Mortgage Debt Relief Act provided relief for home sellers by excluding the income that was generated from the forgiveness of a mortgage debt (either through short sale, foreclosure or loan modification) from their tax returns if the property was their primary residence and there was no more than $2 Million in debt to be excluded.   This act expired on December 31, 2013 after multiple extensions were granted.  There is before Congress currently several bills that would extend the Mortgage Debt Relief Act until either 2015 or 2016, but as of right now a homeowner could potentially owe money on taxes only making their current financial situation even more difficult!

Reuters has indicated that a reduction in short sale activity, potentially driven by the current expiration, would likely increase negative pressure on both timelines and recoveries offsetting some of the benefits of the recent gains in home sale prices.   Heavily supported by the State Attorney Generals offices and most housing and consumer advocate groups we hope to see the HR 2788 Mortgage Forgiveness Tax Relief Act signed into law so that our economic recovery can continue on it’s upward path… and so do we!