The following is a recent article written by one of our Attorney partners, Chris Schneider with Dorband & Schneider, LLP. For referrals to any of our Tax or Legal referral partners please contact us or call (925)567-6720
“The decision to short sale a home is one that should not be taken lightly or rushed into. However, if you’ve resolved to short sale your home but are putting it off for a more convenient time; it is time to get off the fence. If you short sale your home after 2012 you may have a huge tax bill to pay as a result of your delay.
Ordinarily, when you take out a loan and do not pay it back, the amount you do not pay back becomes income for the year in which you defaulted on the loan. This is called Cancellation of Debt income. As an example, let’s say you took out a $200,000 loan to buy your home. You short sale the property for $100,000. As a result of the short sale you would recognize $100,000 of income as a result of the $100,000 that you did not pay back. Assuming a 25% tax rate, you would have a $25,000 tax bill to pay as result of the short sale.
In 2007, Congress passed the Mortgage Debt Relief Act of 2007 (the”Act”). The Act helped countless homeowners avoid the double hit of losing their home and having a tax bill to pay as a result of the foreclosure or short sale. The Act exempts from income, the cancellation of debt attributable to a primary residence. This means that if you are subjected to a foreclosure, modify your loan or short sale your home you will not recognize the income from the cancellation of debt. Using the example above, you would not have any tax to pay thanks to the Act. The big problem is that Congress inserted an expiration date on this protection and it runs out on December 31, 2012.
In order to qualify for protection under the Act you must have the short sale, foreclosure or modification completed before the end of 2012. Considering that some short sales can take many months to complete, the time to act is now. If you wait too long you may have the unpleasant surprise that your transaction is unable to close before the end of 2012 and be stuck with a huge tax bill.”
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