Short Sale Debt Cancellation Set to Go Away
Posted by Hamid Grinage on Wednesday, April 11th, 2012 at 1:25pm.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.
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