Time Running Out on Short Sale Tax Break
There are four months remaining before the Mortgage Forgiveness Debt Relief Act of 2007 expires. There are members in Congress who are pushing to extend the debt forgiveness relief provision which expires at the end of the year. The argument is failing to extend the tax relief will result in massive tax liabilities for taxpayers already under water on their mortgages. The extension is said to have bipartisan support but with the current state of the economy and growing deficit there are no guarantees, especially in an election year.
The Mortgage Debt Relief Act of 2007 allows taxpayers to exclude up to $2 million of forgiven debt on their principal residence in calendar years 2007 through 2012 as long as the discharge of debt is directly related to a decline in the residence's value or in the financial condition of the taxpayer.
There is still time but if you are thinking about a short sale of your home, you must act now to avoid paying taxes to the IRS on any debt forgiven as a result of such a sale. With the low inventory levels of homes for sale in the Sacramento area combined with growing number of buyers and lenders who have streamlined their short sale approvals there is still time to act if you or someone you know is underwater and is considering a short sale.
When a short sale is completed in California the lender is required to forgive the remaining loan balance. However, the IRS normally treats this forgiven debt as taxable income. The Mortgage Forgiveness Debt Relief of 2007 relieves struggling homeowners from having to pay taxes on forgiven mortgage debt if they sell.
The property has to be your primary residence and you have to close on the short sale on or before Dec. 31. The exact reading from IRS Publication 4681 states, "You can exclude canceled debt from income if it is any mortgage you took out to buy, build, or substantially improve your main home." This means that any first mortgages you took out to purchase or build your home, as well as any subsequent loans you received where you used the proceeds to improve your home, can be forgiven.
When you can't keep up with your mortgage payments or have a verifiable need to sell a home for less than the mortgage balance, a short sale is an option homeowners have in order to avoid foreclosure. Most people choose to do a short sale instead of a foreclosure because it has less negative impact on a credit report compared to a foreclosure, which may follow the homeowner forever. Also, if you wanted to obtain a home loan again in the future, lenders view having a short sale on your record more favorably than they do a foreclosure.
Right now time is of the essence if you want to both short sell your house and avoid having to pay the IRS and Franchise Tax Board any tax on your forgiven mortgage debt. With four months to go and no guaranty the act will be extended it is very possible to accomplish this goal if you work with an experienced short sale Realtor.
Naturally I always recommend talking to a tax professional to make sure you qualify for the tax exemption on forgiven mortgage debt.
The reason this act is important in today's housing market is that, without the act, debt reduced through mortgage modifications or short sales qualifies as income to the borrower and is taxable.
At MagnumOne Realty we have been successfully completing short sales since 2005 and if you or someone you know has questions and/or would like to get more information please give me a call at 916-899-6571 or send an me an email to firstname.lastname@example.org.