Complete Your Short Sale As Of December 31 2013 Or Get For A Bill From The IRS

Complete Your Short Sale As Of December 31 2013 Or Get For A Bill From The IRS

It’s no secret; the housing bubble burst in 2007 and gave plummeting home prices a whole new meaning. Our capitol certainly wasn’t immune and suddenly home owners everywhere found themselves owing more to their mortgages than their homes were even worth. 

In order to help alleviate the financial strains, that same year the government passed the Mortgage Forgiveness Debt Relief Act of 2007. Over the past seven years, homeowners engaged in short sales of their primary residences benefited from the Relief Act the most. During a short sale, the current homeowner is unable to pay the total lien amounts they owe. So, the property is sold at a fair market price, but that price is generally much lower than what the seller still owes. Once sold, the seller releases his or her liens on the property and the difference between the payout and amount still owed to the bank is excused, thus allowing the seller to effectively “break even.”

Under the Act, the forgiven debt, normally taxed as income, is simply forgotten. The seller does not owe any kind of federal and/or state income taxes on the difference. That’s a huge relief when you’re typically dealing in hundreds of thousands of dollars.

Let’s take a look at some numbers to bring it into perspective:
If a seller owed $300,000 on their mortgage but, because of declining property values, the most they could sell their house for was $200,000, it was time for a short sale. At this point the mortgage company is willing to allow the property be sold at the $100,000 price cut ($100,000 less than what they were still owed) and absorb the loss. For a seller under the Act, with an exception of a ding to their credit, they were done.

Great news, right? Of course, until you realize that as of midnight on December 31st, that will no longer be the case. Congressional action would be necessary to extend the Act, but with a number of other pressing issues they currently face, it does not look likely they will even get around to it.

Back to the numbers to see what that means exactly:
As of January 1st, the above seller will get a bill in the mail from the IRS showing that they earned $100,000 of income (the difference still owed) on the sale of their home. Even though they didn’t receive a cent at settlement, they will be legally required to pay all of the associated taxes.

However, there is a silver lining in all of this. One reason there has been little support to extend the Act is that home values all over the country have been steadily increasing over the last several years. Enough so that for some, whose only viable option was a short sale, may no longer even need a write down on their mortgage. If you’re curious about the amount at which your home is currently valued, check out our instant home valuation calculator.


Richard Drummond (Broker-Agent) Headshot
Author:
Phone: 240-988-8100
Dated: December 20th 2013
Views: 2,899
About Richard: A native Washingtonian and licensed real estate agent for more than 25 years, Richard is the princip...

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