Tax Breaks for Short Sale Sellers Expire December 31, 2012

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One of the most unfortunate outcomes of the housing market crash was plummeting housing values followed by a series of events leading to a weak economy that further negatively impacted the real estate market. Those people hardest hit as a result have been mortgage holders of homes that are no longer worth at least as much as what is owed on them.

As time continued on and homeowners continued to struggle with keeping up on their mortgages, we started to see loan modifications and other drastic measures taken by banks and property owners to deal with these struggles.

Short sales became a household name as the benefits became more apparent; the government issued a tax break for those people suffering a tax loss as a result of forgiven debt. When a home that is worth less than what is owed on it and a bank agrees to accept the lesser amount, the difference is considered taxable income. Regardless of present day large-scale struggles suffered by countless Americans, they would have to pay income tax on the forgiven debt.

In 2007, however, the Mortgage Forgiveness Debt Relief Act addressed this concern by allowing cancelled or forgiven debt resulting from the sale of a primary residence to be exempt from taxation. The Act, however, is set to expire at the end of this year.

What does this mean for people considering selling their home as a short sale? It means that now is the time to start your short sale if you have been considering one. Because after December 31, 2012 any short sales that close will incur a good amount of income taxes on the forgiven debt. And that amount can add up quickly.

Now, even though short sales have come a long way and some are taking as little as 30 days to process, most of them are still processing for 45, 60, 90 days or even longer. If you are not sure whether there is enough time left to initiate a short sale, contact us today and we will review all the circumstances of your home and financial situation with you. There is still time to put in an application for a short sale but the end of the year is fast approaching.