Homeowners required to endure a short sale of their property in 2014 may be entitled to tax relief if the House of Representatives have their way. As a part of the Tax Increase Prevention Act of 2014, the House voted to extend provisions of the Mortgage Debt Forgiveness Act by a 378-46 vote. The bill has been sent to the Senate, and was given its second reading on December 9, 2014. It is currently placed on the Senate calendar awaiting a vote.
Typically, if a lender forgives a portion of a mortgage debt, the amount forgiven is charged as taxable income to the borrower. Though no money is received, the borrower ends up owing additional taxes. The amount of tax liability, if the law is not extended, can be substantial. For instance, if a lender agrees to forgive $100,000 of debt to permit a short sale, the owner/seller, would need to report that $100,000 as income on their tax return.
The Mortgage Debt Forgiveness Act was created enacted in 2007 to exempt real estate short sales from taxation. The law has been extended periodically, but expired in December of 2013. The bill, if passed, will extend it through 2014.
Most banks, companies offering title closing services and tax professionals are in favor of the legislation. First, if the owner does not have to be concerned about a tax liability upon sale, a short sale can be accomplished more easily. Thus, the real estate market benefits. Second, the owner is not forced to remain in a home he or she can no longer afford.
Third, many people seeking short a sale are experiencing hard financial times. An additional tax burden post sale will not alleviate those hard times.
A substantial number of taxpayers are affected by the legislation. According to RealtyTrac, the number of homes sold via short sale is in excess of five percent of all homes sold. It estimates over 300,000 short sales in 2013, nationwide.