As the end of the year is coming fast upon us, Congress has failed to extend the benefits of the Mortgage Debt Forgiveness Relief Act, which expires on December 31, 2013. Under the provisions of the Act, if you sell your primary residence as a short sale, [that is for less than what you owe on the mortgage], the debt forgiven is not treated as taxable income under the Act. For example, if you sell your home that is $100,000 upside down and $100,000 of debt is forgiven by your lender, and you are in the 15% tax bracket, you could be hit with a $15,000 tax bill if you don't close on your home before the end of this year.
Unfortunately, if Congress does not extend the Act, many will have to file for bankruptcy to avoid the extreme tax consequences related to a short sale since any debt forgiven in Bankruptcy is NOT a taxable event. Also, keep in mind that if the Act is not extended and you close on your home in 2014 and then file bankruptcy, the taxes incurred as a result of the short sale are not dischargeable in your bankruptcy and you would still be on the hook to pay the taxes. Therefore, you must file BEFORE you close on your short sale if the Act has not been extended.
As you can see, failure of Congress to extend the Act could have a significant impact on real estate sales here in Southwest Florida. Hopefully, there will be enough citizens and interested parties contacting their Representatives to take action. For more information on short sales, foreclosures, and your credit score, CLICK HERE.
