If you have been considering a short sale on your Folsom or El Dorado Hills home, time may be running out on federal tax forgiveness. Typically, homeowners considering a short sale are concerned with how a short sale may effect their taxes. During the height of the mortgage melt down in 2007, Congress passed the Mortgage Forgiveness Debt Relief Act in order to mitigate the tax consequences of short sales and foreclosures.
The Mortgage Forgiveness Debt Relief Act states that if you borrow money (up to $2 million dollars) from a bank or a commercial lender and the lender cancels or forgives the debt, then you are not responsible for paying taxes on the forgiven amount. This applies only to primary residences, NOT investment properties. Upon the completion of a successful short sale transaction, your bank is required by law to provide the IRS with a Form 1099-C. The 1099-C will show the IRS the amount of debt which was cancelled or forgiven.
Before December 20, 2007, (this is the date which the Mortgage Forgiveness Debt Relief was enacted) the amount of forgiven debt was considered to be taxable income. This is no longer the case for primary residences; however, all this could change if the Mortgage Forgiveness Act is not extended.
In my opinion, I believe that Congress will extend the act in some form. When the initial bill was passed, five years probably seemed sufficient but the housing crisis has proved to be much deeper and prolonged, and there are many more homeowners who have yet to go through this process.
If you have questions regarding short sales and your real estate options, please call me at (916) 221-8268.
DISCLAIMER: I am a real estate agent and do not give tax advice. Anyone considering a short sale should seek advice from a qualified real estate attorney or their tax professional.