If you are facing foreclosure or planning to â€œshort sellâ€ your home, you had better move FAST. The tax consequences of waiting may be extreme! The act that has protected people from having to pay huge taxes as a result of a foreclosure or short sale is about to expire. In this article from The Seattle Times, it is reported that the likelihood of extending that act is only 50-50.
About Debt Forgiveness:
When someone is:
- foreclosed upon,
- completes a loan modification that includes principal reductionÂ or
- completes a short saleÂ of their principal residence,
the forgiven debt (the difference between the sales price and the remaining debt) isÂ TAXABLE INCOME and the associated taxes must be paid on the following tax return. The IRS publication on that HERE. There is a lot of good information and a required read if you are looking at foreclosure in the near future.
With all the foreclosures and short sales that started in 2006, congress passed the â€œMortgage Debt Relief Act of 2007â€³. That act allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.Â This act is set to expire at the end of 2012.
What this may mean for you:
Simply put, that means if you stop making mortgage payments, today, your foreclosure will may not happen until early next year when the forgiven debt MAY be fully taxable.
The reason for the time frame is that mortgage companies wait at least 90 days after your last missed payment to submit a â€œNotice of Defaultâ€ (NOD). In California, for example, after 90 more days the mortgage company may submit a â€œNotice of Trusteeâ€™s Saleâ€ (NTS). That notice must schedule the sale AT LEAST 21 days from the notice date. Add them all up and we have about seven months. Typically, banks wait a bit more at each step because there are so many homes that are in that situation and they do not want to take them all too quickly. This process can easily drag on for a year or more. we all know someone who has not made mortgage payments in over a year without being served even with the initial NOD. In fact, if you have already stopped making payments and have not yet received the NOD, you are still likely to be in the same situation.
The â€œtake awayâ€ is, if you are in default or expect to be in the near future, you may be better off if you try for a short sale now, rather than waiting for the bank to foreclose. I recommend the following:
Read both of the articles linked to this post.
Contact a tax attorney or CPA (go ahead, spend the money. Youâ€™ll be glad you did).
ACT! Take charge of the situation. Ten months is barely enough time to complete a short sale (if that is what your CPA recommends).
Remember, the IRS WILL BE PAID! â€” the only other thing you cannot avoid.
Posted on Friday, February 24th, 2012 at 5:35 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site. Edit this entry.