There has been a lot of hype in the last year to hurry up and do a short sale because the Debt Forgiveness Act of 2007 is set to expire on December 31, 2012. With it being an election year there is a lot of uncertainty about whether this tax relief will be extended to homeowners receiving debt relief in 2013.
I recently approached my CPA, Tim Nelson with Evans Nelson & Company CPAs, with my concerns that no seller would move forward with a short sale in 2013 if they have to pay tax on the debt forgiven. Much to my surprise he tells me that the Mortgage Debt Forgiveness Act doesn’t really matter for the majority of sellers. He indicated that if the property is a principal residence for 2 of the last 5 years, the seller already qualifies for an exclusion of the gain under section 121 of the tax code for up to $500,000.
Here is an example that Tim gave me……
Mr. and Mrs. Seller do short sale on a home they paid $600,000 for several years ago with short sales price of $200,000 and net proceeds to the bank of $184,000. They owe $493,000. They will receive a 1099-c for $309,000 ($493,000 less the net proceeds of $184,000). With the net proceeds of $184,000 and the debt forgiven of $309,000 the effective sales price of the property is $493,000. If you take the effective sales price of $493,000 and subtract the cost basis of $600,000 there is a net taxable loss of $107,000 and thus no tax due.
Caution: EVERYONE’S TAX SITUATION IS DIFFERENT – CONSULT A GOOD CPA.
So can you do a short sale in 2013 if the Debt Forgiveness Act is not extended and not face a huge tax liability – MAYBE. I recommend to all my clients that they consult their CPA. If they don’t have one I refer them to Tim Nelson.
Call me today if you would like a copy of an article titled “Why The Mortgage Debt Forgiveness Act Doesn’t Matter” by Tim Nelson.
