So far, we have been very fortunate that our government has extended a tax program, for the past 8 years, that will eliminate a taxable mortgage debt that would have been treated as ordinary income namely, the Mortgage Forgiveness Debt Relief Act 2015.
There are approximately more than 1 million homes in the process of foreclosure and 5.3 million homes that are still underwater according to National Association of Realtors (NAR). This means that had the Obama Administration not extended the Mortgage Forgiveness Debt Relief Act 2015 thousands of homeowners who conceded to short-selling their home would have paid income tax on income they never received.
In 2012 there were approximately 55,000 homes per month being sold by REO as described in my article Will the Fiscal Cliff Affect the Mortgage Forgiveness Debt Relief Act. It is apparent why the Obama Administration would extend the Mortgage Forgiveness Debt Relief Act 2015 because the foreclosure fiasco is far from being over.
Given the above facts, will a short sale on your home resolve your mortgage debt or deficiency judgment? Prior to short selling your home be sure to read IRS Ten Facts for Mortgage Debt Forgiveness and Which States Allow Deficiency Judgments.
Should you decide to short sale your home the IRS “insolvency clause” will exempt you for tax liability. The clause clearly states that “a seller is exempt from paying tax on any forgiven debt to the extent that they are insolvent.” This means that homeowners who have debts and liabilities greater than their assets and more than the forgiven debt would be free from paying taxes on the lenders remaining balance.
Are you one of the 5.3 million homeowners that are still underwater? If so, share your story.