Sunday, December 28, 2014

Did you know a short sale of your home could create income for you? ... but not this year ...

Congress extends protection for Homeowners in short sales of their primary residence in 2014 ... 2015 still in question. People forced to sell their homes in short sales in 2014 get a tax break. Congress extended the break earlier in December. Before the housing bubble bursting, people who were forced to sell their homes in a short sale were issued a 1099-C reporting income for the seller. The income was the difference between what was owed and what the house sold for. The tax code considers the amount forgiven at the sale as income to the sellers.

Image courtesy of ratch0013

So if a couple owns a house with a mortgage of $300,000 and they sell it in a short sale for $225,000, the tax code sees that as a benefit of $75,000 and tax it as income. The mortgage will issue the couple a 1099-C for $75,000 and the couple will be required to add it as income on their tax return. This can significantly increase their tax obligation.

Congress has extended a law preventing the IRS from taxing this reduction of debt through 2014. That means anyone who sold their home in a short sale in 2014 will not pay income tax on the amount forgiven. It is not clear if Congress will extend it into 2015. Reports state Congress discuss extending it for two years but the final bill only extended it through 2014. That means anyone having problems in the new year will be betting on or hoping for an extension in 2015. This problem can be avoided in Bankruptcy. I'll explain that in another blog.

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