Will Congress Help Homeowners at Tax Time?

As the end of 2015 draws near, homeowners who managed to escape the financial hit of a foreclosure and sell their home in what is known as a short sale, now have something else to worry about. Now these homeowners have to worry about Uncle Sam.

When a homeowner sells their home for less than the current balance of their mortgage, this is known as a short sale. Let’s use a hypothetical example to explain the situation.

• Harry purchased a home in 2007, at the peak of the market, for $550,000 and he took out a mortgage for $450,000.

• In January 2015, Harry lost his job and could no longer make the mortgage payments. As of January 2015, his mortgage balance was $425,000 but the value of his home was $375,000. If he sold his home in June 2015, he would end up owing $50,000 to the bank. With proper legal representation, Harry might be able to have the bank forgive this $50,000 debt.

Let’s say Harry found a buyer and sold his home in June 2015. Just when Harry thought he was in the clear and his financial woes were over, he learned that Congress has not yet extended the Mortgage Forgiveness Debt Relief Act, which provides that homeowners are not be taxed for mortgage debt that was forgiven by banks after a short sale. For the past few years, the IRS did not make Harry pay tax on the $50,000 in mortgage debt that was forgiven. However, as of October 2015, Congress has not extended the Act for this year. As it stands right now, individuals like Harry who sold their home in a short sale in 2015 will be taxed on that $50,000 as income. This is intended as a hypothetical example. For information regarding the tax implications in your particular situation, we recommend that you consult with a certified accountant.

It is important to be represented by competent legal counsel when dealing with the sale of your home, especially if you are behind on your mortgage. The attorneys and staff at the Lauterbach Law Firm are happy to help you with your legal needs.

Posted 10.26.15