…it may come back to bite you! 

Throughout the foreclosure crisis, doing a short sale…where the bank will take a reduced payoff…has been a reasonable solution for many people to an ongoing foreclosure case.  But all that changed in January 2014 when the Mortgage Debt Relief Forgiveness Act expired.  Now, if you do a short sale and debt is written off…YOU COULD FACE A HUGE IRS TAX BILL.

Let’s do an example with these numbers.  Total amount of mortgage debt= $400,000. Net Short Sale Proceeds $200,000 leaves a deficiency of $200,000.  This amount will be reported to the IRS as 1099-c income and you could be charged for that at your effective tax rate.

Now, there are ways to reduce or effectively treat this debt, but that is on a case by case basis that requires much analysis.

One of the most disturbing aspects I see is that consumers are not being advised of this risk when they work to do short sales, even when using professionals who should be properly advising them.

A recent analysis by the Urban Institute found that about 2 million homeowners will be at risk of incurring that kind of tax liability. A congressional analysis estimates that borrowers will be on the hook for $5.4 billion in extra taxes if Congress fails to renew the tax break, known as the Mortgage Forgiveness Debt Relief Act.


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