Short Sale Could Lead To Big Tax Bill
HOME LOANS, SHORT SALES, TIPS FOR SELLERS
March 29th, 2010
The IRS warns homeowners underwater to study the law regarding debt forgiveness before deciding which course of action to take to get out from underneath an over-encumbered property. The Mortgage Forgiveness Debt Relief Act of 2007 details who will be exempt from paying income taxes on debts forgiven by lenders. Some property owners that successfully sold their home are getting hit with huge tax bills because they were not exempt under this act.
Here are some basic provisions of the bill:
- Relief is granted to borrowers with mortgages on a qualified principal residence. Second homes, rentals and business properties do not qualify
- The maximum amount eligible to be forgiven is $2 million for married taxpayers filing jointly and $1 million for single taxpayers. This should cover 99% of Redding/ Shasta County homeowners!
- The loan must have been used to purchase, build or substantially improve a principal residence. Refinances qualify if the debt stays the same or if the mortgage increased, the funds were used for capital improvements or renovations of the principal residence. In the event the money was used for personal purposes such as paying off credit cards, buying a car or boat, or investing in stocks, then the mortgage debt attributable to those items is not eligible for debt relief
- Homeowners in California who sold their homes in 2009 using a short sale or were foreclosed upon, may be stuck with a bill for income taxes from the state
The IRS views forgiveness of debt as a taxable gift from the lender. The homeowner should inquire with a tax attorney or accountant before agreeing to a short sale. Short sales are less likely to cause as much damage to ones credit rating as a foreclosure but if doing so results in a huge tax liability the homeowner must factor this into their decision. Foreclosure or a Deed in Lieu of Foreclosure may be better options to divest oneself of an underwater property depending on individual circumstances and advice from a tax advisor.
Expect a push in coming months by some lenders to write down the principal balance on loans in an effort to keep homeowners in their homes and off the foreclosure block. Bank of America is undertaking a trial program to do just that due to the failure of loan modification programs. Homeowners can avoid unexpected tax consequences by consulting with qualified tax law professionals before agreeing to a short sale or loan modification.
530-224-6767 or 530-941-7492
BRAD GARBUTT
REALTOR/BROKER ASSOCIATE
REAL LIVING REAL ESTATE PROFESSIONALS
CORNER OF COURT AND PLACER IN REDDING
MORE THAN A QUARTER CENTURY LOCAL SALES EXPERIENCE
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