The 2007 tax law enacted by the IRS that prohibits treating short sale debt forgiveness as taxable income is set to expire, according to a foreclosure lawyer. This same law was set to expire at this time last year, but Congress enacted legislation to extend the program for 2013. This time around, no such legislation is on the docket, and unless a last-minute bill is enacted, the law will expire on December 31. Here’s what this means for your potential short sale, in the words of a foreclosure lawyer.
Short Sale Forgiveness Will Be Taxable
In the short sale process, as you may be aware, your home is sold at an amount lower than the amount you currently owe on the mortgage. The resulting difference is forgiven by the lender as part of the process. For example, if your mortgage is for $300,000, and your home sells at short sale for $240,000, the remaining $60,000 is written off by the lender as forgiven debt. You are under no obligation to pay back this portion, and your mortgage is listed as paid.
There is one important caveat, and that is that, typically, this forgiven debt is treated as a kind of income for tax purposes, meaning you are required to pay any and all applicable taxes on the $60,000 as though you had received $60,000 of extra income in that tax year.
This law was causing havoc for underwater homeowners following the housing market crash, so Congress suspended the tax in 2007 – since then, that forgiven debt has not been taxable as income. But as of December 31, 2013, it will become taxable again.
In other words, if you are thinking about a short sale, act fast! Hire a qualified foreclosure lawyer today.