If you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be taxable. What does this mean to homeowners?
It is common knowledge that in the last few years many properties have been sold as "short sales". A short sale, in its simplest form, occurs when a home is being sold for less that the total amount of liens owed on the property. As an example, a homeowner owes $300,000 on their property, but due to current market conditions the property is being sold for $200,000. The bank agrees to accept the shortfall of $100,000 (plus other associated fees and costs.)
Previous to the passage of the Mortgage Forgiveness Act, the homeowner would be responsible for income taxes on the $100,000 because in the eyes of the IRS, the homeowner gained the difference as regular income. This was devastating for many people, because in addition to walking away from their home with no equity, they now owed a considerable amount of money to the IRS.
If someone finds themselves in a situation where they must sell their primary residence as a short sale, the clock is ticking! There has been no real indication that Congress will extend the benefits of the Mortgage Forgiveness Act past the deadline. Even if they do, it may be a last minute decision and remember ... this is an election year where anything can happen!
If you are contemplating a short sale-take action TODAY!