Dear Sue,
I have scheduled a mid-November appointment with my Realtor to list my home as a short sale.
She advised me to speak with my accountant about the possible tax ramifications of doing a short sale.
I called my regular tax guy. He said that the law that protects home sellers who do short sales from taxation on forgiven debt expires at the end of this year. If that’s true, I only have a couple of months to get my property sold and closed. I know that it’s not enough time.
I called my agent and she said that the bill that exempts taxation on forgiven debt expires at the end of next year.
Now I don’t know who to believe. This is obviously really important to get right.
How can I find out?
~ Nervous Ned
Dear Ned,
Many homeowners who have sold their homes for less than they owe are asking the same question. The last thing they want to be faced with after losing their home is a big fat tax bill!
The Mortgage Debt Relief Act of 2007 signed by George W. Bush changed the way that the Internal Revenue Service views forgiven debt on one’s primary residence.
The Mortgage Debt Relief Act is set to expire at the end of 2012.
Prior to 2007 the IRS considered forgiven debt on one’s primary residence as taxable income. For example, if you owed $100,000 on your residence and sold it short of the full amount owed — say for $80,000, the difference, $20,000, was considered taxable income.
The Mortgage Debt Relief Act applies only to forgiven or cancelled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes. To qualify, the debt must be secured by the home.
This is known as qualified principal residence indebtedness. This provision applies to debt forgiven in calendar years 2007 through 2012. The maximum amount you can treat as qualified principal residence indebtedness is $2 million if filing jointly or $1 million if filing individually.
Any debt reduced through mortgage restructuring, a short sale as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.
There are other exclusions under the mortgage debt relief act including bankruptcy and insolvency. To see if you qualify seek the advice of a qualified tax professional. It could be a matter of good Home $$$s and Sense.
Sue Thompson is the owner of HomeTown Realtors in Auburn. Reach her at seesue@mac.com
