Mortgage Debt Forgiveness Act

In 2007 the Mortgage Debt Forgiveness Act when into effect.  Before the enacting of this Act if you had mortgage forgiveness from your lender this amount that was forgiven was taxable.  If you did a short sale and your lender accepted a sales price of less than what was owed on your home, you were taxed on the amount you were short.  It was considered income.  The Mortgage Debt Forgiveness act changed this.  You no longer had to pay taxes on the amount you were short.  This applies to tax years 2007-2012.  It is scheduled to expire at the end of 2012.

What does this mean to you?  Well, if you are considering doing a short sale, you may want to do it sooner rather than later.  There is no way to tell if this act is going to be extended past the 2012 deadline.  If you do a short sale and close before the end of 2012 this debt may be excluded and not taxed.  If you wait and close after the end of this year the amount of debt forgiven may be taxable.  I know I would not want to pay tax on such a large sum of money!

Another thing to consider is that short sales are time consuming.  Do not wait to initiate the short sale until the end of the year.  The escrow must close before for the end of 2012 for the debt forgiveness to apply.  Let's look at a typical short sale to give you an idea of when you should start in order to close by the end of the year.  In El Cajon, the average time on the market is 80 days, short sale approval (the time you wait for the lender to review your financials and any offers) can take 3-6 months depending on the lender, how quickly you can compile documentation, how responsive the negotiator is and so on.  Once you get the short sale approval, a typical escrow is 30-45 days.  So, so you are looking at 10 months from start to finish on a short sale.  If you want to give yourself a realistic chance to be eligible for the debt forgiveness you need to get started by the end of February of this year.

If you would like more information about initiating a short sale please call me today.  Do not wait and risk not being eligible for the savings.  If you would like more information regarding the Mortgage Forgiveness Act, here is a link to the IRS website.