Short Sale Tax Break To End In 2010

For homeowners who are facing possible foreclosure, one option includes a short sale with loan forgiveness. Homeowners use this approach when they want to avoid foreclosure, but can’t sell the home the mortgage exceeds the home’s current value. The mortgagor agrees to accept the sale price of the home as full payment for the mortgage and forgives the remaining balance.

Under ordinary circumstances, the Internal Revenue Service would consider the amount of the loan forgiveness taxable income. Under the Mortgage Forgiveness Debt Relief Act, signed in December 2007, the loan forgiveness can be tax-free if the homeowner meets certain criteria.

To qualify for the federal tax-free benefit, the home being sold must be the seller’s primary residence, the debt forgiven must be mortgage debt (as opposed to home equity financing) and the sale of the home must have taken place between January 1, 2007 and December 31, 2009.

On January 1, 2010, without further action by the Congress, the tax-free benefits that are currently extended to homeowners who conduct short sales will expire. The law was originally intended to provide relief to homeowners who are facing bankruptcy and foreclosure. There has been no discussion early in this legislative session with regard to re-authorizing the relief. Depending upon the status of the economic recovery, Congress could quickly reauthorize the relief later in the legislative session.

For 2009, however, short sales that include loan forgiveness will continue to be a viable option for homeowners who are seeking to avoid bankruptcy.