A Short Sale, the IRS, and Your Mortgage Tax Bill

Posted on January 28, 2008 in Money Matters by little mochi

Did you know that if you have a really high credit card balance and you could no longer afford to pay the minimums, and if you negotiate for the balance down, the amount the credit card company “forgives” you is considered “income” and is taxable? 

Well, did you know that this concept also applies to selling your home if you sell it for less than your mortgage balance?  In the real estate dictionary, this is considered a short sale.  With the given market condition, many people can no longer afford to pay their mortgages.  Instead of going into foreclosure, home owners are are forced to sell their properties short of what they owe the bank. 

Previously, if you sell your house for $450,000 but you have a $500,000 balance, and the mortgage company “forgives” you on the $50,000, the IRS will tax you on the $50,000 because they view this as income.

Do you know what havoc this would cause and how this could affect the economy?  People already got into the mess of getting themselves into a bad mortgage program.  Then they are forced to sell their homes for less than what they owe.  Now they get hit an immense tax bill on the forgiven amount.  Sticky situation?

President Bush recently signed a bill that just went into law that would help folks in such circumstances.  In a nutshell, the law will eliminate the tax bill that the IRS would normally send you.  This bill is effective Jan 1, 2007 – Jan 1, 2010.

At least a short sale will result in a less impact on your credit than a having to foreclose on your property.  If you foreclose, your FICO score can potentially go down 250 points whereas in a short sale, your credit score can go down by only 100. 

Should we all hop on a plane and fly out to DC to give good old President Bush a hug for saving our asses from foreclosure? 

Nah, I can sure use the few hundred dollars on Little Mochi’s diapers.



Comments

One Comment to “A Short Sale, the IRS, and Your Mortgage Tax Bill”

  1. Lee Matthews -- Financial Concepts West on February 7th, 2008 4:02 pm

    “People already got into the mess of getting themselves into a bad mortgage program.”

    Those who have lethal-mortgages should verify how home equity acceleration could be of benefit:

    More and more folks are using a Home Equity Line of Credit (HELOC) or a business-line-of-credit (BLOC) or personal-line-of-credit (PLOC) as an interest cancellation account to accelerate their home equity and payoff their home *years* sooner than listed on their mortgage amortization schedule.

    Unfortunately, today’s Real Estate market means that folks can no longer count on appreciation to build home equity. Those who realize that they need to pay down their current mortgage debt are looking for alternate ways to aggressively (yet safely) build equity.

    And they’ve discovered a perfect online system to do that; they can focus on their wealth accumulation goals while accelerating their equity simply by using a Home Equity Line of Credit to ‘power’ the Money Merge Account™ financial solutions program.

    A typical 30 year loan (of whatever type) can be paid down in 1/3 to 1/2 the time — it’s a great way to save *huge* amounts of income by eliminating a mortgage amortization front-end interest load. (On a million-plus dollar home, I’ve personally seen where the Money Merge Account™ program will save the homeowner $750,000 in interest charges!)

    And the best thing – homeowners don’t have to refinance their existing mortgage or, in most cases, make any adjustments to their lifestyle.

    It is unfortunate that most of us were never taught to follow three essential principles: (1) Avoid paying interest, whenever possible, (2) Use other people’s money, whenever possible and (3) Find and use a financial system that will guide you, especially if you have the tendency to go off-track. The Money Merge Account™ software and the program’s counselors use these principles to keep each homeowner focused on their wealth accumulation goals.

    I’d be happy to provide further details…

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