Are you aware of the Mortgage Forgiveness Debt Relief Act of 2007? Are you selling your home in a short sale or thinking about selling it as a short sale? Then you need to know about this law that is about to expire.
Because so many homeowners were upside down on their mortgages, Congress passed the Mortgage Forgiveness Debt Relief Act so that sellers would not have to pay taxes on the amount of debt that was forgiven. Without this law, if you owed, say, $200,000 and did a short sale and sold your home for $150,000, you would have to claim the “forgiven” $50,000 as income. With the Mortgage Forgiveness Debt Relief Act, that $50,000 is simply forgiven and you do not need to pay any taxes on it.
The problem is that this law is due to expire on December 31, 2012 and right now it does not look like it will be extended. There is a chance that it may be extended later in 2013 and could be made retro active but that is all speculation right now. This law does not cover all mortgages either, just original mortgages or mortgages taken out to improve the home.
If you are thinking of selling your home and you owe more than it is currently worth, you may want to take this information into consideration and also check with your tax person to see how your taxes would be treated with or without the Mortgage Forgiveness Debt Relief Act as everyone does have different circumstances that need to be taken into account by a tax professional.