A CAUTIONARY TALE ABOUT SHORT SALES AND FORECLOSURES
There are lawyers out there advising people to do a "short sale" or "foreclosure defense" and other way to exit a property, in other words to get out of paying your mortgage on a home. In the past four years this has become big business, helping people get out from under mortgages when they can no longer pay them.
Here is the cautionary tale, after a bank forgives your mortgage debt in a short sale, your tax problems may not be over.
The Internal Revenue Service (IRS) views reduced or canceled debt as "income" and you may have to pay taxes on the amount forgiven. Since 2007, about 1.8 million U.S. homeowners have sold via pre-foreclosure sale, and most of those are short sales, according to the RealtyTrac U.S. Foreclosure Sales Report. Another 12.5 million borrowers are "underwater" on their mortgages, at higher risk for so-called strategic default.
When lenders cancel a debt of $600 or more, by law it must send you and the IRS a 1099-C tax form, entitled Cancelation of Debt, which contains information regarding the canceled debt. Under the Mortgage Debt Relief Act of 2007, if your mortgage debt on your principal residence was canceled between 2007 and 2012, the forgiven amount would not be taxable. The law only applies to primary residences, not second homes or investment property.
However the Mortgage Debt Relief Act of 2007 is set to expire on Dec, 31, 2012. Rep. Charles Rangel, D-N.Y., has introduced a bill (H.R. 4202) to extend the tax relief act. If the Mortgage Debt Relief Act is not extended, the number of bankruptcies could skyrocket after 2012. Waiting to do a short sale after 2012, a homeowner may incur serious tax penalties that they would avoid by short selling before Dec. 31, 2012.
Taxpayers are required to declare any canceled debt on their tax returns by attaching Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, to the tax return. Instructions on how to fill out the form are contained in Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments.
Be careful out there, and just because a lawyer is wanting to "help you" to exit your property, it is possible that any forgiven debt may be considered taxable income. Hopefully the lawyers making money helping people get out of their mortgages are also giving this piece of advice too.
For more information or for a free consultation, contact The Law Offices of Charles D. Scott, PLLC Injury and Family Law Attorneys, by calling 727-300-4878 or view our web site http://www.yourstpetelawyers.com