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Mortgage Debt Tax Relief Not For All Short Sale Sellers
January 22nd, 2008 categories: Las Vegas Mortgage Relief, Las Vegas Seller, Las Vegas Short Sales
Las Vegans look around you. In many neighborhoods you could throw a boomerang and it will fly by several for sale signs before it comes back to you. Do one of those for sale signs belong to you? If yes, then there is a 1 in 5 chance that you are selling your home as a short sale.
Can Homeowners Afford to Sell Their Homes As a Short Sale?
Sellers of short sale properties have a lot of details to keep track of just to get their home sold. In a normal market a Seller typically has the luxury of just trying to keep their house clean for potential buyers. Today, many Sellers who are stuck doing a short sale find that a presentable home is the least of their concerns. They are faced with the prospect of working with their lender(s) to literally “qualify” to sell their home at a loss, which is no small task. In addition, until only recently short sale Sellers had another scary prospect to add to their nightmare…income taxes. Since the IRS considered the net loss on the sale of the home as income, short sale Sellers weren’t sure if they could afford the sale of their home. Why? If they didn’t already have the money to cover the financial loss when the house sells, many won’t have the money to pay the consequential taxes later.
Doing the Short Sale Numbers
Here’s a common example of the total potential loss a short sale Seller’s lender(s) may take on just one house. Let’s say the Seller purchased their lovely new home in November 2006 for $320,000 and their lender(s) gave them a 100% loan. It’s in the neighborhood they wanted to live in and the new home builder offered them so many upgrades, incentives, and closing costs the Seller thought they got a great deal.
Fast forward to October 2007, not even a year later, and the Seller is now getting a divorce, lost their job, got a job transfer, or had unexpected medical bills. Suddenly, they can’t afford to pay their mortgage and want to sell the house. When they approach a REALTOR® to list their home shock sets in because they learn that current market value of their home is around $225,000. In addition, the total costs and fees that a seller typically would pay to sell the home is around $15,000.
What happens if a buyer offers $225,000 for the home? The math looks like this — take the offer price of $225,000 and subtract what is still owed on the loan, $320,000, and so far there is a loss of $95,000. What about the $15,000 in closing costs? Well, someone has to pay them to complete the deal so now the loss increases to $110,000. This is the dollar amount that the IRS may consider taxable income for the short sale Seller.
Mortgage Forgiveness Debt Relief Act of 2007
Well, in between all of the presidential debates and political posturing that seems to infiltrate every inch of media, in December Congress finally implemented a plan for you short sale Sellers. In fact, amid the anxiety and frustration you are experiencing in trying to sell your home, Congress has delivered potential relief to your situation.
What did Congress do? They delivered the HR 3648: “Mortgage Forgiveness Debt Relief Act of 2007″ to President Bush and he signed it into law. Here’s some key language that will positivley effect most short sale Sellers:
“… a bill that eliminates the income tax on mortgage debt forgiveness on primary residences for people in financial hardships and lowers the amount of a gain made through the sale of most non-primary residences that is not subject to income tax.”
Why should a short sale Seller care about this new law? Starting January 1, 2007 homeowners who successfully sell their primary residence homes now will not have to pay taxes on that $110,000. However, for property owners who are selling an investment property or second home as a short sale, the rules haven’t changed. Upon sale the lender(s) will still report the total dollar amount of “forgiven debt” to the IRS and send the Seller a 1099 documenting the finanical deficiency. When its time to do taxes for that calendar year the Seller will have to add that “forgiven debt” on top of their actual income and pay federal income tax for the total amount.
Again, ouch.
Get Professional Advice
Essentially, Congress and President Bush are showing concern for homeowners while telling investors that they are on their own. If you believe that you are somehow effected by this new law, positively or negatively, make sure you seek the assistance of a qualified CPA or tax attorney to get advice about your specific financial situation.
