After meeting with several clients this month, I wanted to make sure everyone is aware the tax exemption for short sales is going to expire—again.
If you are having a déjà vu moment, and are sure you have read this before, it’s because you have. I wrote about this last year. The Mortgage Debt Relief Act was set to expire on Dec. 31, 2012. At that time, I was telling my clients I imagined the government would extend the program for one more year, which is what they did. This year, however, I don’t see any reason why they would extend it for yet another year. Of course, we won’t know for sure until the very last minute. What we do know is if you do a short sale this year, and it closes by Dec. 31, it will be covered under the act.
Normally, when a debt is forgiven, it becomes income and is taxable. It is reported to the IRS by the creditor, and must be included on your tax return. The Mortgage Debt Relief Act allows you to exclude the cancelled debt of purchase money on your principal residence so you don’t have to pay taxes on it. In certain circumstances, some or all of the deficiency from a Home Equity Line of Credit loan also may be covered under this act.
So, if you think you may have to do a short sale, this definitely is the time to start looking into it and getting the process started. Short sales, on average, take three to four months to complete (once there is a contract on the house). It may take longer depending on different circumstances, such as who the bank is, who owns the actual loan, and if there is a second mortgage. The short sale has to be complete and the house closed by Dec. 31, in order to qualify for the Mortgage Debt Relief Act and not be subject to taxes.
What is the deficiency?
When a homeowner does a short sale, the bank is agreeing to sell the property for less than the amount owed, and, therefore, selling the home short. This will be an agreement between the homeowner and the bank, and the remaining balance becomes the deficiency. In a basic example, if the current balance on the mortgage is $400K, and the house is sold as a short sale for $300K, there is a $100,000 deficiency. The borrower will receive a 1099C from the bank for $100,000, and it will be reported to the IRS. With the Mortgage Debt Relief Act, this $100,000 will not be taxable.
What Is the Mortgage Debt Relief Act?
The act was designed to help homeowners who lose their home through foreclosure or a short sale get relief from paying taxes on the deficiency. It was implemented on Dec. 20, 2007, and goes through Dec. 31 of this year. You can get a complete copy of the Mortgage Debt Relief Act on my Web site.
Eligibility
The cancelled debt must be for the purchase, building, or substantial improvements of your principal residence. The maximum amount of forgiven debt is $2 million, or $1 million if married and filing separately. It does apply to refinance, but only if the previous mortgage would have qualified (which, in most cases, it does).
For more information on The Mortgage Debt Relief Act and Short Sales, or for a free confidential consultation,
contact me directly at (602) 571-6799, or send an e-mail to Lorraine@ArizonaShortSaleToday.com. Visit my Web site at www.ArizonaShortSaleToday.com.