Just in time for the holidays, a bill is heading to President Obama’s desk to allow tax relief for those with short sale mortgage forgiveness in 2014.
In short (no pun intended), a short sale is a real estate transaction in which the amount paid for a property falls short of the balance and fees owed and this amount is forgiven. For example, a home may have an accepted offer of $300,000, but with outstanding loan amount of $350,000. The short sale allows for the lender to “forgive” the remaining $50,000.
In years past, this forgiven amount would have been taxable by the IRS as “income.” This typically resulted in a double burden on those with this type of transaction, as they had to pay taxes on this amount after losing their home to a short sale.
The Mortgage Forgiveness Debt Relief Act of 2007 assisted these home sellers by giving them a tax break for the short sale amount. This program was reinstituted in 2009 and 2012. For those who sold under a short sale this year, a tax bill with tax shields for homeowners selling distressed property is headed for President Obama’s desk.
The Tax Increase Prevention Act, which offers this tax shield and other benefits, has already passed the Senate (76 – 16) and the House (387 – 46). President Obama is expected to sign, which will mean a retroactive tax benefit to anyone who sold under a short sale in 2014 – up to December 31. For those with a closing date in 2015, the forgiven debt in the short sale may be considered taxable income.
If you’re curious to know if this bill will cover your real estate transaction, please consult your tax professional.
For more information on Short Sales, check out our previous blog posts covering the subject.
* Final three photos courtesy of freedigitalphotos.net
Thank you for the information on short sales! I’m not sure that I totally understand how the process works, but it sounds like it’s a good deal for home buyers. Can you explain why a home seller would short sell their house and how that would work legally?
A short sale is when the sale of the property will not cover paying off the mortgage- there is a “short” of money. A bank may approve being shorted what they owe instead of having to go through the foreclosure process and becoming a homeowner. The bank has to approve the short sale because they are not being made whole. Sometimes there is more than one bank and only one of them is short. If both are short, both would have to approve. The short sale is less of a hit on a credit report than a foreclosure.