The U.S. Government is giving homeowners until Dec. 31, 2012, to go through a short sale or foreclosure without tax consequences – as long as the lender officially releases the debt. This law has been in affect since 2007.
But starting Jan. 1, 2013, the rules will change: The amount a lender forgives, ether in a short sale or foreclosure, on a primary residence will be taxable on federal income taxes.
So if a house sold $50,000 short of what is owed on the mortgage, then the selling homeowners will owe federal income taxes on that $50,000. Homeowners would owe $12,500 if they’re in the 25 percent bracket; $7,500 if in the 15 percent tax section.
Homeowners would be on the hook even if the house sold but the bank had not formally forgiven the loan in a letter: The banks must officially sign off in writing before Dec. 31. If you are thinking about using short-sale as an option, contact your CPA and find out all of your options. Homeowners declaring bankruptcy could escape paying income taxes on any cancellation of debt income if the debt is forgiven in the bankruptcy. Or homeowners might not have to pay income taxes on any cancellation of debt income to the extent that their debts exceed the value of their assets.
Again, have a chat with your CPA to get clear on the best options for you. Short sales can take a long time. Some have been pending more than one year. Though recently lenders have been speeding up the process. Still, some short sales fall apart because buyers get discourage with the long short sale process and walk away.
To read more about this law visit the IRS page on The Mortgage Forgiveness Debt Relief Act and Debt Cancellation .
