Expiration of Mortgage Forgiveness Debt Relief Act Affects Short Sales
Prior to the Mortgage Foreclosure Debt Forgiveness Act of 2007 that was extended through this year, the IRS rule is that the amount owed that the banks forgive in a short sale will become taxable income to the seller.
There are recent articles in CNN Money this month on the mortgage tax break expiring Jan 1 2014 and how it can mean high tax bills for distressed homeowners who short sale their homes. After reading these articles and spending time reading all the heated online comments by readers, I am amazed at all the mis-information and opinions that people who have not had a hardship have.
With the fiscal cliff looming once again, the extension of this program is not a priority to our lawmakers. Some of the angry public seems to be focusing on the small percentage of strategic defaults by people who bought homes they could not afford or no longer want because they can't refinance. There is outrage by those who pay their mortgage because they can afford to. They are not in favor of bailouts on short sales and foreclosures.
The housing market recovery still seems fragile since all the foreclosed properties have not been released by the banks. Although the number of short sales are down in many areas compared to a few years ago, it seems logical that if there is no incentive for distressed homeowners to short sale their homes, many will continue to stay in the home until foreclosure happens. The short sales that have happened thus far have helped homeowners who became insolvent during the financial crisis avoid foreclosure. Foreclosure significantly affects the housing recovery as well as lowers the neighborhood values more than a short sale does.
Is there any light at the end of this tunnel? There may be a caveat for distressed homeowners going forward within the IRS rules about proving insolvency.
Check with a tax adviser or CPA.
Short sales in my town of Westminster MD are at 15% of the current inventory which shows that many families are trying to avoid foreclosure.
See all short sale listings in Westminster here.
Need more info?
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Jeri Herl
The Herl Home Dream Team
Keller Williams Realty Consultants
800-710-0815
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