New Short Sale Tax Hits This Year

George Nielsen

Many people who are "short selling" their homes this year, or who have in the past few months of 2014, are nervous they are going to be hit with an extensive tax. As of January 1, 2014, the Mortgage Debt Relief Forgiveness Act has expired, meaning that forgiven debt on short sales can now be filed as income by the lender.

Suppose you make an annual salary of $50,000.00. If you short sell your house, and are "short" $100,000.00 (if that's the amount the lender "forgives"), then the lender can file that $100K as income, meaning your taxable income would be $150,000.00, not $50,000. Taxes on such an amount could be around $30K, depending on your income bracket.

For many Americans, as Palm Coast Observer points out, shouldering that financial boulder is too much, and there is no way they can hope to pay that amount. In 2007, many homeowners found themselves in extreme debt when the housing market fell through and their homes were not worth half of what they had just paid. Such an unexpected crash in the value of homes lead to an ad hoc provision by congress, the Mortgage Debt Relief Forgiveness Act. This allowed the forgiven debt to be excluded from your income.

However, with the recent stabilization of the housing market in 2012, there has been less cause to justify the Act, and, as of January 1, 2014, the MDRF Act has not been renewed. This has left many home sellers understandably concerned that they are going to have a monster tax bill.

As the dust settles around what the financial implications of short sales are, places like Short Sale Tax Consequences are helping the majority of people who short sold their homes correctly file their taxes so they avoid such excessive fees. While the waters may seem unsteady, tax companies like this may be the only provision for Americans as time reveals whether or not our housing market is really stable enough to let go of the MDRF Act that protected against short sale debt.