If you have been struggling to keep up with your mortgage and have considered doing a short sale you should act now. The Debt Forgiveness Act of 2007 which exempts many sellers from paying tax on the debt forgiven in a short sale is set to expire on December 31,2012. There is much discussion and speculation about this act being extended but many feel that it will not be. If you want to ensure that your short sale is covered by this act it will need to close on or before December 31, 2012. Due to the fact that most short sales can take 90+ days to complete it is essential that you don’t wait.
Here is a link to a National Association of REALTORS paper on The Debt Forgiveness Act. Many don’t know that there are tax implications when doing a short sale, loan modification or even a foreclosure. Many sellers are simply focused on getting a deficiency wavier (the banks agreement not to come after you for the short fall) that they don’t realize that when the short sale is completed the bank will issue a 1099 for the amount of debt forgiven.
It is crucial when doing a short sale to consult your tax preparer. Every sellers situation and tax implications will be different so meeting with your tax preparer is essential.