Short Sale Limbo Creates Risk Of Tax Bill

Categories: Short Sales

The Mortgage Debt Relief Act expired Jan. 1 and remains in limbo due to Congressional inaction to renew it. This may well be the main reason for the sharp decline in short sales this year for homeowners looking to sell their home for less than what they owe. Californian’s can rest on their purchase money, generally known as a non-recourse loan because of an IRS interpretation of state law, according to this article by Kenneth R. Harney.

Their may be issues of a second mortgage seeking a deficiency payment from borrowers after the close of a short sale on loans taken on a refinance, making a good case for bankruptcy to eliminate both the debt owed and any income taxes that may loom. Another case for bankruptcy would be if there are other debts that homeowners are dealing and their goal is to become DEBT FREE. If Congress does not extend the Mortgage Debt Relief Act, then bankruptcy may be the first stop before a short sale because of the benefits that bankruptcy affords; such as the fact that all debts discharged in bankruptcy incur no income tax consequences.  No debt and no taxes are just two good reasons to consider bankruptcy on the path to financial freedom from debt.

Those who short sold their homes and completed their bankruptcies more than two years ago are now well-positioned to re-enter the housing ownership market, but now face an inventory shortage of homes for sale. It seems the economy still needs time to heal in the wake of devastation left behind from the housing crisis.  My tenured colleagues have seen many business cycles and I agree that this down cycle won’t be over for another two years.  There’s still time to quickly eliminate your debt through bankruptcy, dump that toxic mortgage and undervalued property and save to catch the next housing wave and bull market coming after 2016.

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