Did you elect to have a short sale in 2014 instead of facing foreclosure? Many homeowners across the country who had short sales believed that they’d be facing very high tax bills this year. However, according to a recent article in HousingWire, the House of Representatives and the Senate recently passed a one-year extension of the Mortgage Debt Forgiveness Act, which included the Tax Increase Prevention Act of 2014. By renewing tax breaks for those who had short sales, Congress has given homeowners the opportunity to save some money in 2015.
Taxes and Short Sales: What Should You Know?
When a homeowner faces foreclosure, it’s possible to have a short sale instead. In a short sale, the mortgage lender allows the homeowner to sell his or her property for an amount lower than what the homeowner still owes on the mortgage. Why would a mortgage lender agree to a short sale? Basically, it allows a mortgage lender to avoid the costs and headaches associated with a foreclosure, and it permits the homeowner to do the same (while also allowing the homeowner to help his or her credit rating). The difference between the sale price of your house and the amount you owe on the mortgage is called a “deficiency.”
It’s important to remember, however, that mortgage lenders can still try to collect that additional money on your mortgage loan. Depending on which state you live in, a lender can file a lawsuit to obtain the short sale “deficiency.” In Illinois, mortgage lenders can seek deficiency judgments against homeowners. In other words, unless the lender agrees to waive its right to the short sale deficiency or forgive that amount, a homeowner who has a short sale could end up owing a significant amount of money.
When lenders forgive short sale deficiencies, homeowners can still owe taxes on the amount that was forgiven. The Internal Revenue Service (IRS) says that a forgiven deficiency is like income, and thus the homeowner will owe taxes on it.
So, let’s say a homeowner owes $300,000 on her mortgage loan. She has a short sale and sells the house for only $250,000. The deficiency is $50,000. Even if the lender forgives this amount, the IRS says that the homeowner can owe taxes on the $50,000 as if it were income.
The Mortgage Debt Forgiveness Act allows homeowners who have short sales to exclude some or all of this amount from income for tax purposes. Most importantly, it allowed debt that was forgiven between 2007 through 2013 to be excluded from income. Now, Congress’s decision to extend the Act for another year means that homeowners who had short sales in 2014 won’t need to worry about high taxes on forgiven debt.
Short Sales in 2014
Why is it important to extend the Act through 2014? This past year, the average short sale, according to HousingWire, has a mortgage forgiveness of anywhere between $75,000 and nearly $90,000. For families who struggle to make ends meet, that’s a very substantial amount of money, and taxing it like income would cost those families quite a bit. In addition, RealtyTrac estimates that 2014 saw approximately 170,000 short sales across the country, which resulted in a total “mortgage debt forgiven of about $8.1 billion in the first three quarters of 2014 alone.”
Congress’s decision to extend the Act only applies to short sales that happened in 2014, however. We’ll need to see how the recently elected members of Congress handle additional extensions in 2015. In the meantime, if you have questions about foreclosure or short sales in the Chicago area, contact an experienced Oak Park consumer protection attorney today.
See Related Blog Posts:
No comments:
Post a Comment