Will the Govt. force you to declare bankruptcy as a result of a short sale?

Short sales are becoming more common, banks are becoming more accommodating, and the process has shortened up quite a bit…but that could change if the tax break that currently does not force homeowners who do short sales to claim the forgiven debt on their tax returns is not extended.

On December 31st, 2012, the Mortgage Debt Relief Act, also called the Mortgage Forgiveness Debt Relief Act, will expire if changes are not made to the legislation. When this happens, the “deficiency”, or difference between what your bank ‘nets’ on your short sale and what you owed, if forgiven, once again, will be viewed as taxable income.

This  will  make short sales far less attractive to nearly every distressed property owner. And it could slow down the short sale market long before the end of this year, because “short sales take a while to get approved. If there isn’t an extension of this legislation by June or July, there probably won’t be as much incentive to do short sales in the latter months of 2012 as short sales with some lender can exceed six months from start to finish.

Additional fallout could take the form of more strategic defaults once short sales are no longer an option, warn analysts. If homeowners stand to lose money in the form of additional taxes on the “forgiven” debts on their homes, they may simply opt to walk away from the property at some point. Of course, in the case of strategic defaults – or other forms of foreclosure as well – lenders can pursue the delinquent borrowers for the difference between the amount that they owed on the property when they stopped paying and the amount the lender was able to make when the property was sold. These debts are often difficult to collect, but some lenders opt to wait years before pursuing them in the hopes that former homeowners to get back on their feet and once again have some assets to go after.

Some banks sell the debts to third-party collections companies. Even if this part of the debt is ultimately written off, it can create tax problems years down the road for homeowners because when the debt is written off it may be considered income to the homeowner.

We are hoping that the Mortgage Debt Relief Act will be extended long before it expires on December 31 of this year. If the legislation is not extended, many homeowners may be forced to declare bankruptcy in order to avoid paying income taxes on their “forgiven” debts.

If you are in a position where you think a short sale may be an option for you, please give me a call sooner rather than later.

Thanks…Steve Jackson

561-602-1258 – Direct

email: ShortSale@thejacksonteam.com