2012 is a very important year for anyone who is thinking of short selling their home. A very important law expires at the end of this year, a law that can save a homeowner thousands of dollars of taxable income that results from short sales and foreclosures. If a homeowner waits too many months this year, they may be stuck paying thousands of dollars in taxes that could be avoided if they take action this year. In 2007, Congress passed the Mortgage Debt Relief Act of 2007. This Act is critical to someone who is losing their home to a foreclosure/trustee’s sale or short sale. When someone loses a home to trustee’s sale or a short sale and the bank doesn’t get paid back in full, this deficiency amount will be sent to the person in the form of a 1099. The problem with the 1099 is that the IRS calls this “forgiven debt income,” which is another way of saying that you now have to pay the taxes on the amount that was forgiven as if you had actually earned that money.For example...If you have a loan of $250,000 and your home short sold for $150,000, there is a deficiency of $100,000 (the difference between what you owe and what it sold for). The bank/lender will send you a 1099 for that $100,000. When you file your taxes, you have to include that $100,000 on your return as if you had actually earned it, and the IRS expects you to pay taxes on that amount – even though you never saw the money, never had the chance to withhold taxes, or in any way prepare for that huge tax hit! In general, The Mortgage Debt Relief Act states that if it is your principal residence, and the money that was forgiven was money that was used to buy, build, or improve your principal residence, you are going to be able to deduct all the money that was used for that purpose, up to $2million. This law has saved many home owners thousands of dollars by not having to pay taxes on that forgiven amount. The problem is that this law expires at the end of 2012. In order to benefit from it, your home must short sale or foreclose on or before December 31, 2012. After that, this benefit will no longer be available. What this means is that a homeowner needs to decide in the next few months what they are going to do, because the average short sale is 4-6 months and the average foreclosure/trustee’s sale is 6-9 months, if a homeowner waits until next fall before they decide what to do, it may be too late. No one wants to lose their home. However, if that is going to happen, you don’t want to be stuck paying thousands of dollars in taxes when you could avoid it. Now is the time to get the information to determine what your options are. The information in this is general in nature, and specific circumstances may be treated differently. Because of this, it is critical that someone get professional advice for their specific situation so they can make an informed decision. Now is the time to act!
Brent Hammonds, Associate Broker, CDPE
Solutions Real Estate, LLC
602-717-3219
Fax: 877-500-1776
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