It appears as if the The Mortgage Forgiveness Debt Relief Act and Debt Cancellation (eliminating the short sale tax) will be extended to January 1, 2014.
Without this extension, any debt relief that a homeowner received from the sale of a principal residence would be taxed as ordinary income, thus the label of “short sale tax.”
Short Sale Tax Benefit Extended Through 2013
Based upon what I understand is waiting to be signed by President Obama, the benefit will be extended with the American Tax Payer Relief Act Of 2012 that was passed through the House and Senate, with an effective date of 12/31/2012.
If you look through the 57 document (see previous link), you will find Section 202 contains the words we’ve been waiting for:
SEC. 202. EXTENSION OF EXCLUSION FROM GROSS INCOME OF DISCHARGE OF QUALIFIED PRINCIPAL RESIDENCE INDEBTEDNESS.
(a) IN GENERAL.—Subparagraph (E) of section 108(a)(1) is amended by striking ‘‘January 1, 2013’’ and inserting ‘‘January 1, 2014’’.
(b) EFFECTIVE DATE.—The amendment made by this section shall apply to indebtedness discharged after December 31, 2012
How The Short Sale Tax Benefit Impacts The Housing Market
More people will be able to move this year because of this short sale tax benefit.
When somebody owes more on their home than what it is worth, they should do a short sale. This will typically be the best solution to have the lightest impact on their credit and their future ability to buy a home.
But without the short sale tax benefit, sellers would have to pay income tax on any debt that was forgiven by the lender. This would cause people to stay in their homes for many more years, thus removing them from the market as sellers (AND AS BUYERS!).
You might not have really thought about it, but more than 40% of all buyers have a home to sell first, and if the majority of this segment doesn’t get the short sale tax relief, then they are not going to move. This is why home sales have been so slow in recent years, as many homeowners who want to move simply could not.
But with the continuation of the short sale tax benefit, hopefully we can push the majority of upside down homeowners through the market this year.
If you want to know how to make the best use of this short sale tax relief, just drop me a note and we can review your specific situation.