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TAX BREAK ON SHORT SALE
President Bush signed into law a new measure giving tax breaks to
homeowners who have mortgage debt forgiven. Under pre-existing law, the debt
forgiven by a lender, such as for short sales and refinances, was generally
taxable to the borrower as debt discharge income. With the passage of the
Mortgage Forgiveness Debt Relief Act of 2007, a taxpayer does not have to
pay federal income tax on debt forgiven for a loan secured by a qualified
principal residence.
This tax break applies to debts discharged from January 1, 2007 to December
31, 2009. Qualified principal residence indebtedness is debt incurred in
acquiring, constructing, or substantially improving the residence (up to $2
million for refinances).
For purposes of calculating capital gains, any debts discharged excluded
from income under the new law must be subtracted from the basis of the
taxpayer's principal residence (but not below zero). However, taxpayers may
generally exclude from capital gains income up to $250,000 (or $500,000 for
married couples filing jointly) for properties owned and used as their
principal residence for at least two of the last five years.
WHAT IS A SHORT SALE?
For all the homeowners who are upside down and can no longer make their
mortgage payment (because of either a job loss, divorce, or an option ARM
that's resetting higher), up to now the only option was, well, letting the
bank foreclose. That's not a good option since a foreclosure sticks on your
credit record for at least 10 years. But some experts are now advocating a
"short sale". This is a case of a distinction with a difference: If your
bank agrees to a short sale, you then hire an agent to find a buyer for the
house, you sell the house for a loss, and with the bank's blessing, they
agree to eat the loss (although they could still demand the homeowner make
some kind of payment or share the loss).
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