short sell house
Currently, the nation is undergoing a series of upheavals in housing markets around the country. Homes that were once worth a great deal of money are now worth in excess of a third less than they once were. Unfortunately, this has put many a homeowner in a situation where he or she now owes far more on the mortgage than can be gained from a sale. Understanding shortsale tax implications when short selling a home will be vital.
Compounding this effect is that many of these homes in such distressed markets were bought using adjustable-rate mortgages or some form of exotic financing instrument. The mortgages, though, are beginning to re-set to higher interest rates, tacking on hundreds or even thousands more to the monthly mortgage payment.
Adding the two effects (drops in home values and increases in mortgage payments) and then hitting a homeowner with loss of a job (which is yet another hammer blow and occurring with frequency around the country) makes for a volatile mix, and one in which a homeowner may have to resort to selling the home for less than it’s worth (also called selling the home “short”) in order to avoid foreclosure.
In almost every instance, a shortsale will be far better in the long run than just letting a home go into foreclosure. Normally, people who have to take the shortsale route are unable to afford a mortgage even if it were able to be refinanced. Remember; they were counting, back in the heady days of the hot real estate market, on being able to sell the home for a tidy profit before new interest rates kicked in.
Fortunately for most, the Mortgage Forgiveness Debt Relief Act of 2007 was signed into law by former president George W. Bush that year. At least for federal tax purposes (which used to tax the difference between what was owed on the home and the reduced rate it sold for), this tax burden has been removed, though the Act is set to expire on December 31, 2009.
This can lift a huge load off many an owner’s back. Previously, the short seller was looking at a substantial federal tax on the sale. Unfortunately, though, many states have not followed suit and will still tax the difference, which can be quite large, in some cases. As an example, let’s say that a home that had a mortgage balance of 400, 000 dollars short-sold for 250, 000 dollars.
In some states – many of which tax at 9 percent or higher – a seller will still be looking at a significant payment to be made, especially if the bank issues them a federal Form 1099, which they must, by law, do. In this case, it behooves the home seller to take on the services of a tax negotiation service in order to arrange for repayment or reduction (or even forgiveness) of the amount of the tax.
While the federal law on the books currently (and it may be extended further) is clear, it’s best to check the short sale tax laws in each state in order to gain an understanding of what may or may not be owed upon final sale and transfer of title from the old owner to the new owner at closing. Remember; forewarned is forearmed.
Get all the must-know facts on Shortsales as well as Shortsale Tax Implications, now at http://www.nphsrealestate.org/short-sale/law-tax
Short Sale vs Foreclosure