Congress extends tax break for short sales

Homeowners who had short sales in 2014 received an additional gift this holiday season when President Obama signed an 11th-hour extension of the Mortgage Forgiveness Debt Relief Act, giving thousands of Americans cause to celebrate.

Until the act was extended, homeowners who went through the short sale process would have had to pay income tax on the amount of the loan that was forgiven, which in many cases is upward of $100,000.

The federal tax code treats forgiven debt like income, meaning homeowners could have faced a tax bill for tens of thousands of dollars. The act, established in 2007, changed the tax code to treat forgiven debt under a short sale or loan modification as nontaxable. That exemption expired on Dec. 31, 2013, but Congress has now extended it through Dec. 31, 2014.

The Mortgage Debt Forgiveness Act passed by a wide margin in the House of Representatives on Dec. 5 and passed 76-16 in the Senate on Dec. 17. President Obama signed the extension into law on Dec. 28.

The extension only applies to short sales conducted in 2014. Any further extension of the short sale tax break would need to be taken into consideration by the newly elected members of Congress when the Congress begins its 2015 session in January.

The average short sale has an estimated mortgage forgiveness of $88,456, according to real estate data tracking firm RealtyTrac. There have been more than 121,700 short sales since the Mortgage Forgiveness Debt Relief Act was created in 2007, with a total mortgage debt forgiveness of nearly $10.8 billion, according to RealtyTrac.

The firm also estimated that the potential taxes on the average short sale to be $22,114, which would have brought the total tax liability to $2.7 billion.

A loanDepot licensed loan officer can help with these and any other lending questions. Call (888) 983-3240 to speak with one today.

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