This law exempts current homeowners from serious income taxes normally incurred when mortgage debt is forgiven – including in cases where an underwater home is sold short. A mortgage lender extends cash to a borrower when they make a mortgage on a home. If that debt is wiped out without actually being paid back, then the cash that was extended to that borrower is normally considered income by the IRS, and is taxed as such.
But when the real estate market crashed, the federal government enacted this Act to eliminate the thousands and thousands of dollars of income taxes the average American who loses a home to foreclosure or short sale would otherwise incur.
This Act is set to expire on December 31, 2012. Most industry insiders expect it will be extended before that time, but growing numbers are surprised it hasn’t already been. And with the upcoming election, some are unsure what will happen.
If you need to sell an underwater home via a short sale, the time to list it was really a few months ago. But some servicers are expediting these transactions so that it might still be possible to get your short sale closed before year’s end. If your escrow closes by December 31st, you’ll avoid the enormous tax burden that could result if the Act expires and you had to do a short sale in the future. (Ask your accountant or financial advisory for advice on your specific situation.)
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