IRS Mortgage Debt Forgiveness 2012 for Short Sales

One big problem in short selling or foreclosures is the tax burden.

If your home is foreclosed, deed in lieu, or short sold, the debt forgiven is taxable income.  For example:

You owe = $200,000

You short sale the house and the bank agrees to take fair market value = $120,000.

$80,000 was the amount forgiven, which is now classified as taxable income to you. 

You currently make $40,000 annual income that you pay taxes on. 

Now add the $80,000 for the year, and you just made $120,000 for the year, which you owe taxes on at the higher tax rate. 

BUT - Since 2007, we have had the Mortgage Forgiveness Debt Relief Act of 2007 - takes you to for quick info.  Under this Act, if the home was a primary residence, the 1099 you receive for the short sale, foreclosure, deed in lieu, etc., is FORGIVEN....aka NOT TAXED!  (I'm not a tax professional, CPA, certified tax preparer, and all the other legal junk I have to write here due to our over litigious society). 

BIG PROBLEM on the horizon:  This Act sunsets December 31st, 2012.  Meaning, if your short sale doesn't close by then, you no longer have the tax shelter.

There are many people trying to get this extended, and I hope this does get extended as I don't see short sales slowing up any time soon in Jacksonville Florida.  (Half our market is still classified as Distressed). 

HOWEVER, for now we have to work with what we have.  We have a deadline coming, and if you think you are in need of a short sale, time is ticking and you are already a little late to the show.  Get moving quickly with your plans to short sale!

Posted by Brad Officer on
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