Tax Relief For Short Sellers
Great news if you’re thinking about a short sale on your home—Congress has just extended the Mortgage Forgiveness Tax Relief Act for another year. The act has its roots in 2007, enacted to help those whose mortgages had suddenly outpaced the actual market value of their homes. In the simplest terms, the act protects the seller from having to claim the amount of debt forgiven by their lender on a short sale as taxable income for that calendar year. For the last couple of years the act has required renewal by Congress and actually didn’t exist for the year 2015 until it was just recently renewed retroactively. What this means is if you’re thinking of a short sale, now is the time to act—the process takes longer than a conventional sale and the tax relief act is only guaranteed to be at your disposal for 2016, there’s no guarantee that it will be available beyond that.
The actual Mortgage Forgiveness Tax Relief Act is a bit dense and full of financial jargon, so lets break it down to what’s important to you, the seller-
- Normally when a home is sold for less than what is owed on its mortgage the amount of debt forgiven is considered taxable income by the IRS.
- The Mortgage Forgiveness Tax Relief Act protects the seller from having to claim the forgiven debt as taxable income as long as a few criteria are met-
- The amount of forgiven debt is below two million dollars
- The home has been the seller’s principal place of residence for two of the last five years
- The debt was for buying, building or making improvements on the home
- The act has only been extended to cover the 2016 calendar year. Considering that the amount of time it takes to complete a short sale can far exceed a conventional real estate transaction it is definitely in your best interest to contact your real estate agent and begin the process as soon as possible.
While a short sale is never anybody’s idea of a perfect situation, the Mortgage Forgiveness Tax Relief Act does help ease the financial burden on the seller. To make sure you qualify for forgiveness through the act consult a trusted real estate professional. The inner workings of taxes and real estate can be complicated and teaming up with someone who deals with them everyday and has a network of financial and legal professionals at their disposal is your best bet for coming out of this in the best shape possible. – – ——-Michael Larson