In 2007, Congress passed the Mortgage Forgiveness Debt Relief Act. Due to the number of foreclosures and homes sold as short sales, Congress passed the Mortgage Forgiveness Debt Relief Act so that homeowners facing distressed property sales wouldn't be taxed on the cancelled debt.
What is Cancellation of Debt?
If you borrow money from a lender and the lender later cancels or forgives your debt, you may have to include the cancelled amount in income for tax purposes. The lender is usually required to report the amount of the canceled debt to you and the IRS.
Here is a simplified example: You borrow $200,000 and default on the loan after paying back $100,000. If the lender doesn't collect the remaining debt from you, there's a cancellation of debt of $100,000. This income is generally taxable income to you.
Is Cancellation of Debt income always taxable?
Not always. There are some exceptions. CLICK HERE for more detailed information.
The Mortgage Forgiveness Debt Relief Act expires on December 31, 2012. Therefore, if you are a Seller who may need to sell your property as a short sale, the time to start that process is NOW! Short Sales typically take 4-6 months to process for Lender Approval. While the possibility does exist that the law may be extended, there is no guarantee and time may be running out. As of this writing, your transaction must close on or before December 31, 2012 or you may incur significant tax liabilities.
Call today, (978)433-0000 or CONTACT ME if you'd like short sale assistance in Massachusetts or New Hampshire.
About the Author:
Catherine is a licensed real estate broker in Massachusetts and New Hampshire and has worked as a REALTOR for approximately 25 years. If you, or anyone you know, are thinking of buying or selling a property, Integrity Residential Brokerage located in Pepperell, MA, would love to hear from you! We strive to offer you the highest level of professional assistance possible making your desires and goals a reality.
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