Short Sale Tax Relief

The Mortgage Forgiveness Debt Relief Act expired on December 31, 2013 creating a substantial tax risk for short sale or deed in lieu debt forgiveness. A short sale happens when the bank agrees to let you sell your home for less than what is owed on the note/mortgage. The bank takes the proceeds from the sale and, in exchange, forgives the remaining balance. The IRS considers the amount forgiven income to you, even though you never received any money, and you must report it as income on your tax return. Prior to January 1, 2014 if the home you sold at short sale was purchased as your primary residence the Mortgage Forgiveness Debt Relief Act allowed you to exempt the forgiven debt from your income, resulting in no financial impact. Unfortunately, that law has expired and with it the exemption. That means if you short sale your home in 2014 and the bank forgives your remaining debt you may have to pay income tax on the amount forgiven, which may cost you tens of thousands of dollars. Congress can reinstitute the short sale mortgage exemption before the end of the year, allowing for retroactive application of the exemption, but that is not guaranteed and, in the meantime, a short sales may create significant tax exposure.

If you have questions regarding foreclosure, short sales or any other legal matter please contact Matthew C. Bothwell, P.A. We are here to help.