Foreclosure & Short Sale Taxes Coming in 2014

Did you know that if you complete a Short Sale in 2013 you might be able to walk-away scot-free without owing a dime in mortgage forgiveness income tax, sometimes referred to as “short sale tax” or “foreclosure tax”?  If you complete that same Short Sale on January 1st, 2014 you very well may wind up owing the IRS “short sale tax” or “foreclosure tax” if they foreclose on your home.
The Mortgage Debt Forgiveness Relief Act provides a tax exemption to owner-occupied homeowners when their mortgage company forgives debt through a short sale or foreclosure, or in the very rare circumstance of a principle reduction (which is a statistical rarity). The Mortgage Debt Forgiveness Act was originally passed in 2007 and was extended in 2009 through December 31st, 2012. It was then extended one final time by Congress, until December 31st, 2013. This means that in 2014 many homeowners will be on the hook for “short sale tax” or “foreclosure tax”.
Here is an example scenario:
-You owe $400k on your mortgage
-Your home is worth $300k in today’s market
-When you complete a short sale, you will receive a 1099 from your bank for approximately $100k of forgiveness income
-If you complete the short sale in 2013 you will NOT have to pay taxes on that 1099 amount (assuming you qualify for the tax exemption)
-If you complete the short sale in 2014 you WILL have to pay mortgage forgiveness tax on that 1099 amount
What this means is that if you are considering doing a short sale or allowing your property to go to foreclosure, you want to do what you can to have that finalized by the end of 2013 to avoid “short sale tax”. If you stop making your payments many lenders are taking 12+ months to foreclosure. Additionally, many lenders don’t issue the 1099 until they resell the property after foreclosing, which can often be another 6-12 months later. This means that even if your lender forecloses on you in late 2013, they may not finalize your 1099 until 2013 creating a “foreclosure tax” for you.
The average short sale is now taking about 3-4 months with many lenders having improved their short sale processes over the past two years.   However, it is not out of the ordinary for a short sale to take 6-8 months.
The conclusion: If you are stuck in your house upside down the best bet on getting out of it without costing yourself any more money in “short sale tax” or “foreclosure tax” is to get started on a short sale in early 2013 so that you leave yourself plenty of cushion to close in time to take advantage of the expiring Mortgage Debt Forgiveness Relief Act. As an added bonus, you may also take advantage of the government’s HAFA program, also expiring 12/31/13, and receive $3,000 in cash at closing.

For more information please visit our
Mortgage Debt Forgiveness Relief Act page.  For additional information, please visit this LA Times article on the expiration of the Mortgage Debt Forgiveness Relief Act
If you would like to discuss your options for short sales, loan modifications, or foreclosure further, please call us. We are your source for Yorba Linda short sales, Anaheim Hills short sales, Placentia short sales, Brea short sales, Fullerton short sales, Corona short sales, North Orange County short sales, Orange County short sales, & Riverside short sales. We are happy to give you all of the information relevant to your situation and allow you to make the best decision for you and your family. We have helped numerous families avoid foreclosure and would like to do the same for you.

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