Short Sale Deadline

We have previously discussed short sales. There are advantages and disadvantages. I have seen that often owners of real estate are misled or pressured by a claimed need for a short sale.

The point of this post is to discuss the change in the law as to a the tax liability on short sales scheduled to take place after December 31, 2012. This change may lead to a greater need to file a fort lauderdale bankruptcy instead of attempting a short sale.

Normally, if there is a short sale and release of the balance of the debt, the lender will issue a 1099-C for forgiveness of debt income. The owner would have to report the forgiveness of debt as income. The forgiveness of debt income could be eliminated if the debtor is insolvent. An IRS form 982 could be utilized.

Congress passed the Mortgage Forgiveness Debt Relief Act which eliminates the forgiveness of debt income for mortgages used for the homestead.(This would not include equity lines used for investment property or other purposes not connected with the home). Thus a homeowner could enter a short sale, obtain a release, and not owe income taxes. However, this provision expires the end of this year. Unless the Mortgage Foregiveness Debt Relief Act is extended by Congress, a short sale in 2013 will again involve a 1099-c which will increase the benefit of a bankruptcy over a short sale.

There is no forgiveness of debt income if a property owner files for bankruptcy prior to the release of debt by the lender. As a result, short sales prior to a bankruptcy discharge may be highly prejudicial to the property owner. This issue might be more critical in 2013.

Prior to any short sale, a property owner should consult with a bankruptcy attorney and an accountant to review the possible tax consequences of the short sale.



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