If you were considering selling a home in a short sale, act now! The Mortgage Debt Relief Act of 2007 expires in 2012, which is right around the corner. Under the Mortgage Debt Relief Act, taxpayers can exclude realized income from the debt on their principal residence. If your loan is cancelled or forgiven, you will receive a Form 1099-C for the balance forgiven. This form is reported to the IRS because it is treated as income for tax purposes. The Mortgage Debt Relief Act grants relief from that taxable income.
There is little talk in Congress about extending this act so plan ahead! If you wait until after 2012, the laws prior to the provision will be retroactively instated. Let’s say you sold your home for a short sale of $300,000 and you owed $500,000. You will receive a 1099-C, which shows that the lender forgave you $200,000. If you sold your home before December 31, 2012, you will not owe any income tax. If the closing occurred after January 1, 2013, you will be taxed on that $200,000.
If you are considering a short sale, act quickly before it’s too late!
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