As it stands now, this will be the last year that many financially distressed homeowners will be able to do a short sale or foreclosure and not get a tax bill for the forgiven debt. In the past, if someone had any debt forgiven, it was treated as income on their taxes. In 2007, Congress passed the Mortgage Forgiveness Debt Relief Act, which waived the tax liability on forgiven mortgage debt under certain circumstances. This was renewed once, but is set to expire at the end of 2012.
Considering that many homeowners are under water $10s of thousands or more, this tax liability could really add up for anyone who waits too long. See the video below for an example.
What does this mean for homeowners? As mentioned by Alex Charfen at the Distressed Property Institute, if someone is considering a short sale, they need to take action now. Short sales can take a number of months to get approved and there will be a huge rush at the end of the year. For anyone who’s uncertain about their options, it’s a good idea to talk with a real estate agent who’s knowledgable about short sales, as well as an attorney and CPA.
As a disclaimer, this is for informational purposes and not intended to be legal or financial advice.