It’s a common conundrum these days: homeowners faced with increasing mortgage payments need to sell their homes fast, but home values have decreased and they can’t sell their homes for as much as they owe on them!

 

There is a transaction that resolves this issue called a short sale, in which you actually sell your home for less than you owe on it, and your lender agrees to forgive the difference.  Until very recently, if you did a short sale, your lender would send you a 1099 form at the end of the year, and the IRS would actually charge you income tax on the difference between what you sold your home for and what you owed on it.  [Talk about kicking someone while they’re down, right?  Can’t make your payment, selling your home at a loss, and now you get a tax bill, too?]

 

Many sellers simply said no, and chose foreclosure over selling the place and getting a big tax bill for the forgiven debt.

 

In December, the federal goverment passed this new law – it’s a mouthful – the Mortgage Debt Forgiveness Relief Act of 2007 – it basically says:

• if you have to sell your home in a short sale, and 
• you do so in 2007, 2008 or 2009,
• the IRS will not charge you with income tax on the mortgage debt that your lender forgives. 

The point? To provide some incentive for people who are upside down on their homes to get aggressive with their pricing and get them sold, rather than letting them go into foreclosure, which is bad for their credit, bad for the banks, and even bad for the neighborhood and city.

 

Why should you care? If you’re a seller and your house has been sitting on the market for a long time, get aggressive and price it to sell – we’re in a declining market right now, so you’ll need to price it even below what the recent sales in the neighborhood were if you really want to attract buyers.  But get it sold, don’t worry about that particular tax issue, and get some closure and start your financial recovery!

Filed under: Mortgage & Credit, Sell