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Debt Relief Act coming to an end in 2012

Posted on 13 January 2012 by Aaron Hofmann

2012 is a big year for home owners facing foreclosure. Currently, there is a federal tax break for homeowners who want to unload their homes for less than they paid for them. The Mortgage Forgiveness Debt Relief Act became effective in 2007 and has been extended through the end of 2012.

This has allowed owners selling their homes through a short sale to do so without having to pay tax on the amount their mortgage holders forgave them. That will end in less than a year, giving homeowners until the end of this year to get out from under their debt without facing tax consequences.

When you find yourself in financial distress, it’s good to know that you have options to foreclosure. Short sales are a way for homeowners to be proactive in selling their home and negotiating the terms with the bank. Foreclosure is something that is done to you and you really don’t have any say in the matter in when they will foreclose, whether they will forgive the debt and how it will be reported on your credit.

The Mortgage Forgiveness Debt Relief Act provides that forgiven debt in many of these situations is not taxable. The tax law has been a nice benefit to those who have lost their home and would have been faced with a tax bill, even after having lost their home.

The best strategy for anyone considering asking their bank for permission to do a short sale is to meet with a Certified Distressed Property Expert.

The worst thing to do is walk away from your home and force the mortgage holder to take back the property. A short sale is almost always a better option than foreclosure.

The tax change means that if a house is sold for $100,000 less than what’s owed on the mortgage, the seller would owe federal income taxes on that amount. If the seller is in the 15 percent tax bracket, they would owe the IRS $15,000. Since your state tax return is derived from your federal adjusted gross income, it would also be taxed at the state level in most states.

In December, 42 out of 131 Smyrna Vinings homes, condos and townhomes were short sales or foreclosures, equating to 32% of all transactions.

Some real estate analysts think doing away with the tax incentive will sabotage the government’s efforts to gradually move people out of homes they can no longer afford.

Almost every client I meet with asks about receiving a 1099 if they do a short sale. What they need to realize is, the IRS will require the 1099 to be issued for forgiven debt whether from a short sale or foreclosure. The important fact to note is whether you will be covered by the Mortgage Forgiveness Debt Relief Act by doing a short sale before the end of the year or procrastinating and risking that the short sale doesn’t get completed until next year when the law is no longer in effect.

Do yourself a favor and don’t procrastinate. Contact us today to see what your options are in avoiding a Smyrna Vinings foreclosure.

Aaron Hofmann

Keller Williams Realty Cityside – Short Sales

C: 770-653-9601


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