LOVELAND – Seems like Short Sales are now a thing of the past, but there are still situations that deem a Short Sale necessary. The tax break for homeowners with short sales expired at the end of 2014. Congress has yet to renew this tax break for another two years, so it’s currently uncertain whether homeowners who completed short sales during 2015 will have to pay additional taxes. Below is an update on what the tax break is and how it may impact your taxes.
What is the forgiven debt
When you go through a short sale, the lender who owns your mortgage is essentially forgiving part of your debt since they are accepting less than what is owed on your loan. For example, if your loan balance is $300,000 but the lender agrees to a short shale where they net only $250,000, then the amount of debt forgiven is $50,000.
How forgiven debt affects taxes
Normally, the amount of forgiven debt is considered as income. So, if your lender forgave $50,000 of your debt, that amount would be reported as income for 2015. This means that you would pay taxes on that income (and it may actually put you into a higher tax bracket than normal).
Impact of the tax break
The tax break previously signed into law allowed homeowners with short sales to avoid paying taxes on the forgiven debt. Without the tax break, it might be better for a homeowner to allow a property to go into foreclosure rather than trying to work with a lender to sell it beforehand as a short sale. The tax implications of a short sale would otherwise create an additional hardship for homeowners.
Short sales are normally better for everyone involved. Foreclosures are expensive, so lenders may get more money from a short sale than a foreclosure. Homeowners can benefit as well. Foreclosures impact a homeowner’s credit history a bit more than a short sale would. Given these benefits, it is likely that Congress will renew this tax break, but that has yet to be seen. If you completed a short sale in 2015, it may be best to wait until this is decided.
Suzanne Plewes is a Broker Associate at RE/MAX Alliance in Loveland. If you have questions regarding real estate, please write to 750 W. Eisenhower Blvd., Loveland, CO 80537, call 970.290.0373 or e-mail [email protected].