Are you thinking about short selling your home? Are you underwater (owe more on your mortgage than the current market value of your home)? If you have ever or are considering a short sale, your days are numbered.
The Mortgage Forgiveness Debt Relief Act, that wonderful little piece of legislation passed in 2007 to protect those who short sale from being liable for the capital gains taxes (taxes on the difference between what you sell your home for and what you actually owe), expires on December 31, 2012. For the last several years, most homeowners who have short sold their properties have escaped this tax due to the act.
If you are considering a short sale this year, you need to get your home SOLD before December 31, or the IRS will require the debt be reported as general income. As an example, if you owe $300,000 on your mortgage, but short sell your home for it’s current $250,000 market value (where the lender forgives the difference), after December 31 you will be liable to pay taxes on the $50,000 difference. At a marginal tax rate of 36%, this would equate to $18,000 in taxes.
There are the requirements for the debt relief law to apply:
1. The home you are short selling must be your principal residence, it cannot be a vacation home or investment property
2. Debt ceiling is $2,000,000 (or $1,000,000 if married and filing separately)
3. The law does not apply to a HELOC which was used to pay off debt or as cash-out
Will the act be extended? Of course this is a possibility, but there have been no public discussions as of yet. Taking into consideration that this is also an election year it could either become a big deal or be swept under the rug, as politicians choose to deal with other issues. Regardless, this is not the time to take a chance.
If you are considering a short sale you need to look into the facts now, because as we all know: procrastination gets you nowhere.