Short sale sellers need to close in 2012 for debt forgiveness

Did you know that if a bank writes off debt in a short sale, it’s a taxable event?  It is true. The lender tells the Internal Revenue Service about the transaction by submitting a “Form 1099-C, Cancellation of Debt” at the end of the year. This means that home sellers must acknowledge the amount when they fill out their federal taxes.  But, through Dec. 31, 2012, the federal government forgives any tax liability associated with forgiveness of a mortgage loan.

Will the debt forgiveness continue after the deadline is over?
The government generally considers forgiven debt to be income. If a seller has signed legal loan papers to take out a $200,000 mortgage and the lender accepts $100,000 in a short sale, for example, the seller received the equivalent of $100,000 in free money by government estimates. As a result, the IRS taxes it. For tax year 2012, however, the government still forgives the debt; in 2013, it might not.

The tax amount can be significant. On a debt of $100,000, a short-sale seller in the 25 percent tax bracket could end up owing $25,000 in income taxes.

Since short sales can take months and even fall through, homeowners considering a short sale may want to start the process sooner rather than later.

Note: Always talk to your tax advisor or CPA about tax consequences of real estate
Sourece: Florida Realtors®