Starting Jan. 1, short sales may carry hidden cost

According to the U.S. Internal Revenue Service (IRS), a homeowner who owes money to a mortgage lender is given something akin to a gift when the lender cancels out some mortgage debt through a short sale. As a result, the IRS sees that forgiven money as income and could tax it accordingly.

A 2007 law designed to help homeowners specifically forbids the IRS from taxing forgiven money on a principal residence, however, since people who can’t afford to keep their home generally can’t afford higher taxes less than a year later. But that law expires on Dec. 31, 2012.

Any short sale that occurs on or after Jan. 1, 2013 – barring further action by Congress – would face a federal income tax on the forgiven portion of their mortgage.

While Congress could agree to extend the tax forgiveness and most experts see bipartisan support to do so, a presidential election and looming end-of-the-year fiscal crisis will capture most lawmakers’ attention. An extension, even if it occurs, is not considered a sure thing by the Dec. 31 deadline.

That leaves at-risk homeowners with a dilemma. They can hope Congress extends the tax forgiveness or they can list their home as a short sale soon.

Since many short sale transactions take longer than non-short sales, a home needs to be listed – and ideally pre-approved by the lender as a short sale – while it still has enough to time to attract a buyer and close. With only three-and-a-half months remaining in 2012, the window for a new listing has started to close.

If the end of the year looms and the short-sale tax forgiveness deadline has not been extended, Realtors and others involved in home sales could find their holidays curtailed by end-of-the-year closings as sellers rush to beat the clock.

“I’m not making any plans for Dec. 31,” Sunrise real estate lawyer Gary Singer told the Fort Lauderdale Sun Sentinel. “I expect to be in the office very late.”

For more information on the Mortgage Forgiveness Debt Relief Act, visit the IRS’s website.

© 2012 Florida Realtors®