Thinking about short selling your home? Will the expiration of the 2007 Mortgage Debt Relief Act cause tax liability on short sales in 2013? Can you short sale in 2013 & NOT be hit with a HUGE tax bill?
We see headlines like this,
"New taxes on forgiven mortgage debt to hit owners"
This post located at CBS News declares the gloom and doom to short sales and how if you don't close a short sale before year end 2012 you will have mega taxes to pay for short selling your property!
Well everyone likes a good gloom and doom story, but as a Realtor my job is to find answers to questions on how something like the expiration of the 2007 Mortgage Relief Act might not be the big concern that the media has already portrayed it.
If you have an active short sale in the works or if you are thinking you need to short sale your property in 2013, what I wanted to suggest is that you consider options and angles that exist out there in the event it did not get closed by the December 31st.
- The Fed’s have through the end of this month to extend the 2007 Tax Forgiveness Act. There will not be any tax consequence due to an extension of the 2007 Act. Waiting to see what they get passed.
- If the 2007 Act were not extended you may still qualify for an exclusion via Insolvency. Note the definition of this is “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.” http://www.irs.gov/Individuals/The-Mortgage-Forgiveness-Debt-Relief-Act-and-Debt-Cancellation-.
Shown on form 982 located at http://www.irs.gov/pub/irs-pdf/f982.pdf .
That Insolvency Exclusion is something a CPA would have to answer for you specifically after looking at your overall situation. IRS Form 982 was used prior to the enactment of the 2007 Mortgage Debt Relief Act so it has been around a long time.
One CPA I spoke with explained that the insolvency exclusion is out there as an option to keep the IRS away from those doing short sales in the years to come.
He communicated to me that, "the insolvency calculation is pretty straight forward but it is calculation pertaining to the everything the taxpayer owns immediately before the short sale in this case. There are some tax attributes that will need to be adjusted if the taxpayer has any. (Nol, basi in other property, etc)."
Furthermore a tax Attorney I have worked with in the past related to short sales noted, "The insolvency exception has long been the law and will continue. The IRS worksheet should be utilized to see if your client qualifies."
At the end of the day, or calender year 2012 for that matter, if you are in a distressed situation, don't forego the benefit of a short sale as opposed to a Deed in Lieu or Foreclosure because one of the exclusions is gone. I hope the attached links are helpful if you find yourself in a distressed housing situation.
Want to see more on Schools including test scores, locations, parent reviews? Information on listings? Need information on Utilities and how to connect? Do you wonder what things to see and do in Gwinnett? View the New Movers Digital Magazine to find out more about Living in Gwinnett and experience the most unique digital magazine in existence!