A recent development arising from the collapse of the housing market has been the rapid increase in the real estate industry practice known as short sales. As more and more homeowners find themselves in the precarious position of owing more on their homes than what they are currently worth, many homeowners have begun to consider whether taking part in a short sale might be more beneficial than going through with the normal foreclosure process or filing for bankruptcy protection. Although for some individuals a short sale might appear more beneficial than other traditional options, in many cases there are significant drawbacks to taking part in a short sale, and a host of problems that the seller does not discover until later. Before you proceed with a short sale you should consider what is discussed in this article and ask critical questions of the people who are proposing this transaction to you. In a real estate short-sale, the struggling homeowner sells his or her home for less than what is owed in hopes that the lender will accept this amount in satisfaction of the mortgage debt. Lenders are likely to agree to a short sale only where the homeowner appears to be unable to continue making payments, and only where the property’s value is less than the mortgage balance. The difference between what is owed and the selling price is known as a “deficiency.” A short sale is really only beneficial to a homeowner if he can receive a guarantee from the lender that he will not
One of the key provisions of the “Fiscal Cliff” compromise recently signed into law was the one year extension of the Mortgage Forgiveness Debt Relief Act. Congress originally passed this legislation in 2007 which generally allows taxpayers to exclude the forgiveness of mortgage debt from being counted as taxable income by the Internal Revenue Service. Debt on a homeowner’s primary residence that is reduced through a short-sale, foreclosure, or other forms of mortgage restructuring now continue to qualify for this type of relief, at least for another year.
Normally when you borrow money from a commercial lender and the debt is cancelled or forgiven, absent certain exceptions, you may have to include the cancelled amount as income for tax purposes. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt. The Mortgage Forgiveness Debt Relief Act, scheduled to expire at the end of last year, exempts the forgiveness of mortgage debt from being counted as taxable income by the IRS.