Short Sale Tax Implications?

Foreclosure is like a nightmare to all people facing it. Most of them will literally do anything to avoid its complicated and devastating consequences. More people than ever are heading towards it because their financial situation doesn’t allow them to afford any mortgage payments. The most obvious solution that causes less damage is definitely short selling your property quickly before it gets foreclosed. While there are some damages that go with sort selling, they will never be as the ones caused by foreclosure. If you want to understand the short sale tax implications, then here is a simple and easy to understand explanation. When your mortgage balance is more than what your actual home is worth, then you will be paying more than what your home costs. It’s true that you can ignore it and keep paying anyway, especially if you have money, but for people who don’t, they will be paying a lot of extra money, where they could have just short sell their property. When lenders usually accept short sales, they will take care of all that remaining balance, so you don’t have to worry about it. The reason behind lenders accepting to lose money is that they don’t want the property to be foreclosed as this could affect them negatively as well. While short selling your property could be your only way to not ruining your credit, there are some implications that will take effect when you get approved. While your lender is forgiving your remaining mortgage balance, the IRS won’t. They consider this forgiven amount as a taxable income and by that you should be paying as if it’s an income that you’ve generated. Lucky for you, President George Bush has released the “Mortgage Forgiveness Debt Relief Act” in 2007. This act is viable until the last day of 2012. This act will indemnify you from paying any taxes on that forgiven debt. After December 31, 2012, no one actually knows if there will be an extension of this act or not, so you should check if you happen to be outside this period before you proceed with your short sale. I’ve heard many short sale experts talk about other solutions to avoid paying taxes, but none of these methods are really confirmed. There is a rumor that you can make a deal with your lender to reclassify your forgiven debt so it won’t be a subject of taxes, but I’m really unable to confirm this. Bottom line, you should consider hiring a professional short sale agent to advise you of what you should and should not do.