2012 - The Year Of The Short Sale - Sellers Can Realize A Substantial Tax Advantage This Year - Why?

Are you going through a SS right now or thinking of doing one

? You may want to read this. Usually when a homeowner did a Short Sale (SS) before this act was passed, the actual amount of debt forgiven would be subject to income tax. For example, if a homeowner had a loan for $200,000 and then sold the home in a SS for $100,000, then that homeowner would need to pay income tax on the $100,000 of forgiven debt. In other words, take whatever you make in a given year, and add $100,000 to it and you are paying that much in income tax that year to the IRS. This is literally kicking someone when they are already down because the majority of people going through a SS are already in financial straits and the last thing they need is to pay taxes on the debt forgiven. In most cases homeowners would be hard-pressed to come up with this money in the first place.

The Mortgage Debt Forgiveness Act allows a homeowner of a home that is/was their primary residence to be EXEMPT from paying income tax on forgiven debt. This piece of the legislation is set to expire at the end of this year, barring any extension by the federal government.

It is important to note that this exclusion benefit does not apply to investor or 2nd home/vacation homeowners, and only applies to primary residence owners. This act essentially saves tens of thousands of dollars for the typical troubled homeowner going through a SS or distress sale. It allows for incentive for these homeowners to go through with the sale and get an otherwise underwater home revalued and sold for a new buyer looking to be a new steward of that home; this needs to happen in order for the overall market to improve. There are hundreds of thousands of homeowners throughout the country that have gone through this process and benefited dramatically by not having to pay taxes after the SS was completed. Further, this act has been a buffer to keep several homes from going into foreclosure, and by going the way of the SS, homeowners can realize considerable benefits as well as having the hit on their credit less damaging as compared to a foreclosure.

Information regarding this specific issue can also be found on the IRS's website.

Normally, debt that is forgiven or cancelled by a lender must be included as income on your tax return and is taxable. But the Mortgage Forgiveness Debt Relief Act allows you to exclude certain cancelled debt on your principal residence from income. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief. If you are a home owner and you are considering doing a SS, its in your best interest to get in touch with a local REALTOR professional that specializes in doing SS negotiations. Many consumers would be surprised to know that the majority of agents in the marketplace are ill suited and uneducated as to the specific intricacies and nuances with regards to the SS process.

by: Irane Martinez

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