Homeowners who may be considering a short sale of their home this year will need to act quickly in order to take advantage of a tax break. The Mortgage Debt Relief Act is set to expire at the end of the year and there have been no indication of whether Congress will extend the deadlines set by the act.
Homeowners who complete short sales to settle their debt for an amount less than they owe end up with forgiven debt which may be considered income by the IRS and be subject to income tax. However, as part of The Mortgage Debt Relief Act, there is a homeowner exemption which generally allows taxpayers to exclude income on forgiven debt on their principal residence. Debt reduced through loan modification, as well as debt forgiven in connection with a short sale or foreclosure, qualifies for the tax exemption.
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The act has set a deadline of Jan. 31, 2013, for the completions of short sales in order to qualify for the tax exemption. Although some lenders like Bank of America have streamlined their process, a short sale can take from 4 to 6 months from listing to close of escrow. Homeowners who want to take advantage of a short sale and the tax exemption are running out of time.
The tax codes for dealing with the debt forgiveness tax exemption are anything but simple and we can provide some general guidelines for qualification but we always encourage our MagnumOne Realty clients to seek counsel from their CPA or another tax professional before completing a short sale.
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