Short Sale Debt Cancellation Set to Go AwayPosted by Hamid Grinage on Wednesday, April 11th, 2012 at 1:25pm.
Short sales always present more challenges than normal sales, simply because a short sale is a type of distressed sale and requires the borrowers lender to participate if it is to be done. The lender must approve everything from the price, to commission for the agents, and most imortantly the forgiveness of the debt that is owed beyond the proceeds of the sale. So naturally, there has been somewhat of a battle between the interests of the banks and the interest of homeowners who are underwater. Originally, when you did a short sale you were taxed on the amount that you were forgiven by the lender. This was a serious downside to doing a short sale because it could leave you with a large tax bill. For example, if you bought a house for $500k, still owe $450k and it's now worth $250k in the current market then doing a short sale means that you would be forgiven $200k by the lender (assuming it sold for 250k) The IRS looks at the forgiven $200k as "Imputable" income which is subject to normal tax rates. But in 2007 when short sales really took off, Congress passed a provision that allowed homeowners to exclude forgiven debt on their income taxes. This was much needed, as short sales have been and continue to be a huge part of the market and will be for some time.
The provision was extended once through 2012, but it is currently set to expire in 2013. There is s huge effort to get it extended again..and I hope for the sake of the real estate market in Oakland and across the country..and all the homeowners who are underwater and facing hard times that it's extended again. The last thing our economy needs is another financial burden on taxpayers. Although our marker in Oakland is seeing vast improvements, short sales will continue to be a part of the market for at least a couple more years. For this reason, it's important that the det cancellation stays in place.