What Short Sale Homeowners Should Know

9 02 2012

Homeowners considering a short sale may want to start the process now and should try to close by December 31, 2012 as the government may or may not extend the tax provision for any tax liability associated with forgiveness of a mortgage loan.

Short sales normally take time to process and may even fall through before homeowners can close on their homes. If a bank writes off debt in a short sale, it’s a “taxable event,” and the lender tells the Internal Revenue Service about the deal by submitting a “Form 1099-C, Cancellation of Debt” at the end of the year. Home sellers must acknowledge the amount when they fill out their federal taxes. The federal government forgives any tax liability associated with forgiveness of a mortgage loan.

The government generally considers forgiven debt to be income. If a seller has signed legal loan papers to take out a $200,000 mortgage and the lender accepts $100,000 in a short sale, for example, the seller received the equivalent of $100,000 in free money by government estimates. As a result, the IRS taxes it. The tax amount can be significant. On a debt of $100,000, a short-sale seller in the 25 percent tax bracket could end up owing $25,000 in income taxes.

For tax year 2012, however, the government still forgives the debt; in 2013, it might not.

In general, homeowners believe the government will extend this tax provision. However, as evidenced by the First Time Homebuyer Credit expiration in 2010, you can’t always count on the government to bail you out.

If you or someone you know need to consider a short sale, please consult with a local real estate professional who is knowledgeable with a short sale process and has a proven track record in the number of transactions they have completed to help homeowners avoid the foreclosure. Ask your real estate professional for his/her credentials and designations so you know they have the education and expertise in dealing with a pre-foreclosure/short sale process.

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