The Mortgage Forgiveness Debt Relief Act and Debt Cancellation - Short Sales

There are alot of Questions regarding Short Sales & the IRS taxes afterwards...

Regarding the IRS taxes, right now there is an Act called Mortgage forgiveness and debt relief act..

The Mortgage Debt Relief Act of 2007 generally 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.

http://www.irs.gov/individuals/article/0,,id=179414,00.html

From this link…

·       HomeOwners:

 Qualified principal residence indebtedness: This is the exception created by the Mortgage Debt Relief Act of 2007 and applies to most homeowners.

Investors:

·         Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets.

I would recommend checking with your accountant on this regarding the Insolvency category, and if it would apply. .

If not, you also may be able to take a Capital Loss that would usually cover the short sale “Income”.. See info here

http://stevebeede.com/2010/04/investors-may-avoid-debt-forgiveness-tax/

What happens when you have to walk away from your home?

If you are living in a underwater mortgaged home, it can be a huge and very tough decision to walk away form your home. Each person must make a decision that works for them morally and financially, but also each person must face reality with a bold & realistic attitude as well. Alternatives to a short sale is a home loan modification as well, but those are many times unsuccessful. Weigh your options carefully & don't make the decision too hastily either. Keep in mind that sometimes the best decisions are not the easiest decisions.

Check out this article from Reuters - Yahoo Finance.
http://finance.yahoo.com/news/what-happens-when-you-walk-away-from-your-home-.html

• Pros: Settle Debt, Move on with your life, Tax Free on the "income" you received thru the debt settlement at the moment,
• Cons: 85-160 hit on your credit rating, Embarrassing, Higher interest rates when you borrow again.

Short Sale Market Update in Lake City, FL

http://newsgeni.us/?p=103219

"Seems to be right on with my expectation for the market.  Lots of sales, but more soft prices and shorts until we clear up the current economic situation that many home sellers got themselves into.  Massive over-leveraged debt is no longer in fashion, and that sentiment extends even to the big banks.  The federal government doesn’t seem to interested in austerity, but capitalistic corporations see the need to right-size before they capsize. 

Some short sale trends I expect to see:

-We will start to see the major lenders and even some of the smaller lenders start to waive or reduce deficiencies, even on secondary homes and investment properties.

-For properties in markets that are still predicted to drop, we will see more lender incentives (cash to seller, simpler review processes, etc) to get shorts done.

-Modifications will really take a back seat lenders rush to de-leverage. 

-The people that have gotten used to not making a payment for 2 years will suddenly find time has run out, and in these cases of severe delinquency, it will be almost impossible to modify, and may be almost as hard to short sale, as the banks will mandate their foreclosure attorneys to clear out bad assets as quickly as possible.

-2012 may be a bloodbath for the lenders, but it will bring much needed liquidity to the market, and will be a haven for Buyers, and hard working Realtors."

Credit to:

Rob Stewart,

Short Sale Specialist,

Rockford Realty Group

1099-c Cancellation of Debt on Foreclosure or short Sale

Wondering about a 1099-c regarding cancellation of debt on a foreclosure or short sale. You may qualify for NOT paying taxex on that "income"
http://www.irs.gov/newsroom/article/0,,id=174034,00.html