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August 29, 2012

Tall Taxes on Tap for Short Sales in 2013

Pursuing a short sale could soon be much more taxing for homeowners heading into 2013.

A short sale occurs when lenders forgive part of the loan debt (technically viewed as income, for tax purposes) and take less than they’re owed. The Mortgage Debt Relief Act of 2007 has been allowing home sellers to exclude up to $2M of this debt/income on their principal residence since 2007. Debt related to a loan modification, as well as a foreclosure, has also qualified for the exclusion.

However, the Act expires at the end of 2012. That means that if the government doesn’t extend the Act’s benefits, homeowners who close a short sale in 2013 will be responsible for paying tax on the forgiven debt. This could translate into big bucks, and doesn’t help if a homeowner is already in financial difficulty.

Here are more details, straight from the Tax Board’s Web site.

I’ve consulted a few sources within the short sale sector of the real estate industry, and word on the street is that there are a couple versions of the Act in both houses at the moment. But neither have much steam behind them. So a closing in January 2013 or later would mean taxation issues for the amount of debt forgiven. This will particularly affect homeowners who are upside down on their property, but who have some wealth to protect.

It may not be too late to start and complete a short sale now; it all depends on the property location and details, as well as the lenders involved. Short sales can take many months to finish, and we’ve only got four months left in 2012. Give me a call if you’d like to talk confidentially about your own situation.

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