There is not much time left, but those in San Francisco who can take advantage of a short sale before the end of 2012 would be wise to do so. A number of tax law changes are about to take place on January 1, 2013, if Congress does not act – which it seems unlikely to do.
For those who are unfamiliar with a short sale, it is a process whereby a home that is underwater (owing more to the mortgage than the home is worth) are allowed to sell the house for whatever it can get. The bank takes the money, which is short, and the homeowner is supposed to be able to walk away.
The kink in that plan is the federal Mortgage Debt Forgiveness Act will expire on December 31. The act was part of the banking bailout and reform. If it expires, the homeowner will need to once again pay federal tax on the unpaid mortgage debt.
To use round numbers, assume that your mortgage sits at $200,000 but your home is worth $150,000. If the bank allows a short sale, it is forgiving the $50,000 difference between the home value and the underlying mortgage. According to the IRS, you would owe taxes on that $50,000 even though you didn’t actually receive it.
The moral of this story is, if you can’t do a short sale prior to the end of the year, plan on either paying taxes on the unpaid mortgage debt or plan on staying in your house long enough for the house to come up from underwater.
Source: CNNMoney, “Short Sales Jump Ahead of Tax Hike,” Les Christie, Dec. 11, 2012
- At our San Francisco law office we assist both individuals and small businesses as they manage their exposure to tax audits as well as other IRS and state tax liability issues.