2015 short sellers face familiar tax risk

01/08/2015

2015 short sellers face familiar tax risk

WASHINGTON – Jan. 5, 2015 – The extension of the Mortgage Forgiveness Debt Relief Act through Dec. 31, 2014, by the Senate is good news for Americans who completed short sales in 2014. However, that good news doesn't extend to sellers currently hoping to complete a short sale this year.

A Chicago homeowner had $100,000 in mortgage debt forgiven by his bank in 2014, for example, when his home went through a short sale. Until Congress passed the Act in December, that $100,000 would have been viewed as income by the IRS, and he would be liable for about $28,000 in taxes when he gets his 2014 taxes together over the next few months.

For this homeowner, the December passage of the Mortgage Forgiveness Tax Relief Act came as a relief. However, short sellers in 2015 will have to play the hope-and-wait game as he did, as they track Congressional moves for another extension. If Congress fails to pass an extension – and they came close to doing that this year – short sellers will owe tax on that forgiven money in early 2016 when they calculate their 2015 taxes.

Due to the tax problem, a number of homeowners allowed their property to go into foreclosure rather than agree to a short sale. Still, nearly 122,000 U.S. short sales went to closing through the first 11 months of the year, with an estimated average debt forgiveness of about $88,500, according to RealtyTrac.

Will Congress extend the tax forgiveness again in 2015?

According to writer Kenneth Harney, the chances are "not great." House leaders on tax policy favor some form of broad tax reform, and they generally dislike temporary tax code laws that require a legislative extension now and again.

Harney says the only way tax forgiveness will be extended again is if "proponents make a strong case for mortgage debt relief as a permanent part of the tax code."

Source: Los Angeles Times (12/28/14) Harney, Kenneth R.

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