If you are stuck in an underwater home and are considering a short sale, you may be in for a surprise if you don’t close on the sale by the end of the year. Starting Jan. 1, 2013, the IRS will begin counting most forgiven mortgage debt as income that can be taxed.
Even if you convince the bank to forgive the difference between the sale price of your home and the full amount you owe on it, you are still facing a big risk if it’s done after December 31, 2012. This is an especially hard hit for people who have been struggling to pay their mortgage and finally realize they need a fresh start. For example, if a bank reduces a mortgage principle by $100,000, that homeowner would be taxed on that amount, because it is treated as income. This means that a homeowner in a 20% tax bracket would owe $20,000 after losing their home and trying to move on.
Will the Tax Relief Be Extended?
The Mortgage Forgiveness Debt Relief Act passed in 2007 at the beginning of the housing decline. Congress has discussed extending the measure, but if the law will be extended with only 3 months to go until the end of the year, particularly considering it is an election year. Extending the provision for two years would cost the government more than $2 billion in tax revenue, at a time when Republicans and Democrats both boast about cutting deficits. On the other hand, Congress may consider that there are still way too many short sales that have not yet been approved yet and the consequences for the home industry are far too great to slow the turn-around by failing to extend this benefit.
It goes without saying that these tax consequences may place families in a bind. That does not mean that a short sale suddenly becomes a bad idea after the beginning of the year. On the contrary, it still may be the best solution depending on your specific circumstances. But, it is important for all families to be fully educated about their options and the ramifications of each choice.
What The Law Does Now?
What the law does now is it allows homeowners to write off up to $2 million in mortgage debt this year, as long as it was spent on buying or improving a primary residence. By the beginning of 2013 that won’t be the case. So while securing a deficiency waiver will keep the bank collectors away, the IRS will still want to be paid its percentage of the waived amount.
The bottom line is that there is little to lose by acting fast, and trying to secure the benefit that exists today. No matter what, even if things do not fall into place this year, never forget that you do have options. If you want help with this matter to find the best possible solution for your situation, contact one of our experienced Burlington County short sale lawyers, free of charge.