By Gary M. Singer, Sun Sentinel –
QUESTION: I have decided to sell my home through a short sale. I have heard that the deadline for the tax waiver is the end of the year. After that, you have to pay taxes on any debt that the lender forgives. I don’t want to owe money to the government. Now I’m unsure whether to go through with the short sale.
—Sarah
ANSWER: The Mortgage Forgiveness Debt Relief Act of 2007 does expire at the end of this year, and industry groups and observers are concerned about the effect on homeowners and the real estate market in general. Most pundits, including me, think the law will be extended at some point. Still, this isn’t something you can count on.
As it is now, the amount the lender forgives on most primary residences is not taxable. No extension would make short sales less attractive next year and beyond because sellers would have to pay taxes due to the forgiven debt. This could result in tax hits of a few thousand dollars or considerably more.
Despite the potential tax liability, a short sale still may be the best choice — particularly if you owe much more than the house is worth, you’re getting divorced or you have to move quickly for a new job. Consult an accountant and see about your specific situation. Despite its reputation, the Internal Revenue Service often is willing to work with taxpayers.
