During the Fiscal Cliff negotiations, the Mortgage Forgiveness Debt Relief Act was extended through December 31, 2013. This is great news for homeowners who are considering a short sale on their principal residences. Generally, if a bank lends you money to purchase your home, and the bank later 
cancels or forgives the debt balance, you may have to include the cancelled balance as income for tax purposes. The Mortgage Forgiveness Debt Relief Act allows a homeowner to exclude this amount, which saves a homeowner thousands of dollars in tax liability.
For example, if a homeowner owes $200,000 on a home, and the homeowner and the bank agree to a short sale on the property for $75,000, there is a $125,000 principal balance left over. Without the Mortgage Debt Relief Act, the homeowner would have to pay federal taxes on the $125,000 balance, because the government would consider the $125,000 “earned income.” Because the Act is in place for 2013, the tax debt owed by the Homeowner will be waived, if the closing takes place in 2013. If you are considering a short sale of your principal residence, it will be beneficial to have it resolved this year so that you can take advantage of this Act before it expires.
Feel Free to Contact Us for more information about the extension and what it means to you.
