The Mortgage Forgiveness Debt Relief Act and Debt Cancellation has been Extended through January 1, 2014. I know many homeowners in the process of doing a short sale or considering doing one in the near future, are breathing a huge sigh of relief at the news!
What is the The Mortgage Forgiveness Debt Relief Act and Debt
The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. So if you’re a seller who is doing a short sale, the amount the bank has forgiven, usually is taxed as income, but with the Mortgage Debt Relief Act, it’s possible not to be taxed on that amount.
An example would be if you owe 200k on your mortgage and you sold it as a short sale for 150k, the 50k would normally be included as income, but with the this act, you may be able to have that amount completely waived. Not everyone may qualify, so it’s best to check on the IRS website or to speak to a CPA.
Now, when the Mortgage Debt Relief Act of 2007 does finally expire, it does not mean short sale sellers are doomed and have a huge tax bill. If it is possible to show that you are insolvent at the time the debt was forgiven, you may be able to reduce the amount or have it waived completely. You are insolvent when your total debts are more than the fair market value of your total assets. To protect yourself either way consult an attorney and/or a CPA.
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If you are behind on your mortgage and facing foreclosure, call me at 904-910-3516 to discuss your options.