The end of short sales?

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Homes being sold as “short sales” have increased over the last few years. A short sale is when a bank agrees to sell a home for less than what is owed on the current mortgage. It has been a driving force for some homeowners to get out of an underwater situation on their current home.

What many people do not know is that going through a short sale could result in additional income on your taxes. Let me explain. If you sell a home for $100,000, but you owed $150,000, you will receive a 1099 showing “income to you” at $50,000. The debt is forgiven by the bank (in most cases) on a short sale, but the IRS views the difference as taxable income. Depending on your tax bracket, this could result in taxes owed in excess of $10,000.

This scenario has NOT been a problem since 2007. Homeowners selling their homes as a short sale property have not needed to report the difference as income on their tax returns. Why? The Mortgage Debt Forgiveness Relief Act allows homeowners to be exempt from taxes on the difference between the purchase price and amount owned on a home when selling their homes as a short sale.

The Mortgage Debt Forgiveness Relief Act expires at the end of the year. If it isn’t extended, homeowners will be required to file their taxes with the difference as taxable income. This will cut down on the number of short sales as homeowners may turn to foreclosure and/or bankruptcy.

It will be interesting to see how this works itself out between now and the end of the year.

If you are selling a home as a short sale, you need to work now to do whatever you can to ensure the home closes before the end of the year as their is no guarantee of an extension to this act.

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One Response to “The end of short sales?”

  1. The possible end of short sales – an annual tradition | The Mortgage Blog Says:

    […] seems like a year ago this scenario was making rounds in headlines. Well, that is because it was in the […]

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