Update on Short Sales and Taxable Debt Relief: Help on the Way

For those contemplating the choice between doing a short sale or a regular foreclosure, the potential tax liability that may result associated with debt relief on a short sale is definite negative. At least one piece of helpful legislation appears to be making its way through the congressional maze.

This yesterday from Peter Miller’s FHA Mortgage Guide:

FHA Mortgages — Senate Passes Bill To End Tax on Mortgage Forgiveness

Posted: 17 Dec 2007 10:43 AM CST

The Senate has passed the Mortgage Cancellation Relief Act of 2007, a measure which would end the income tax borrowers face when lenders forgive up to $2 million in outstanding mortgage debt.Sponsored by Sen. Debbie Stabenow (D-MI), the measure would also extend the deductibility of mortgage insurance for three more years. The current legislation making mortgage insurance deductible applies only to loans made between January 1st and December 31st of this year.

Under Section 108 of the Internal Revenue Code, forgiven mortgage debt is seen as “imputed” — and taxable — income. Many of those who negotiate a “short sale” with a lender wind up owing thousands of dollars to Uncle Sam because the forgiven debt is considered to be income under the tax rules.

Previously, the House had passed a similar bill, HR. 3648.

The bills are likely to zoom through the conference process and to be signed by the President. Why? Just how much money can the government collect from distressed, foreclosed and bankrupt borrowers?

This is encouraging news for sellers and agents who wish to pursue this option but were worried about have a big tax bill. Now, I still maintain that a short may be no better for your credit and Fico score than a foreclosure, but we now reasonably expect to see relief from the tax consequence.

Got a question or concern? Contact me here. Or apply for a loan. I do loans in most of the western U.S. and I’ve been doing FHA and VA loans for nearly two decades.

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