Real ANSWER | Tax Benefits for Short Selling Before the End of 2012

Q :  I’ve heard that there is a big tax advantage to short selling my home before the end of 2012—what is it and what does it mean for me?

A  : Yes, there is an advantage. Congress moved quickly to provide troubled homeowners with tax relief for income resulting from forgiven mortgage debt*—The Mortgage Forgiveness Debt Relief Act of 2007.

The Act allows taxpayers to exclude income from the discharge of debt on their principal residence.  Meaning, if you short sell your home—you may not have to pay taxes on the amount of money your lender agrees to forgive.

The primary tax benefit of short selling your principal residence before the end of 2012 is to take advantage of this favorable provision before it expires.

If you are faced with a mortgage you can no longer afford, consult your real estate professional, attorney, and tax preparer to discuss your different options and how each may affect your specific situation.

*In simple terms, “forgiven mortgage debt” is the result of your lender agreeing to accept an amount for your home that is less than the amount that you owe—commonly called a short sale. The “forgiveness of debt” amount is viewed by the Internal Revenue Services as income for the seller and therefore reported on that individual’s tax return as taxable income.

IN COMPLIANCE WITH IRS CIRCULAR 230, WE ARE REQUIRED TO DECLARE THAT ANY WRITTEN TAX ADVICE CONTAINED IN THIS COMMUNICATION (INCLUDING ANY ATTACHMENTS) IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, FOR THE PURPOSE OF (1) AVOIDING ANY PENALTIES UNDER THE INTERNAL REVENUE CODE, OR (2) PROMOTING, MARKETING, OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. ANY WRITTEN ADVICE THAT WE PROVIDE DOES NOT TAKE INTO ACCOUNT THE POSSIBILITY THAT A TAX RETURN WILL NOT BE AUDITED, THAT AN ISSUE WILL NOT BE RAISED ON AUDIT, OR THAT AN ISSUE WILL BE RESOLVED THROUGH SETTLEMENT IF RAISED.