I have homeowners calling me a lot lately about not wanting to do a short sale because of the Mortgage Debt Relief Act expiring at the end of this year. So I wanted to let everyone else know what I am telling them and why most do not have to worry about this debt act expiring, if it does. Just a reminder, this is how I did not have to pay taxes on my short sale. Its called Insolvency.
So lets say the Debt Act is not extended, there’s another significant exception to a homeowner’s obligation to pay taxes upon a deficiency waiver – insolvency. If you’re insolvent, as defined by IRS Code, then you have no tax liability on any deficiency waiver. What does it mean to be “insolvent”? I’m no tax expert (and anyone in this situation should seek advice from an accountant). However, it’s simpler than it sounds – you’re insolvent when your total debts exceed the total fair market value of all of your assets. Yes, “assets” includes everything you own. Most homeowners don’t have enough assets, so they’ll fit the bill. Just think about it. Using my example, above, if your house is worth $175,000 and you owe $300,000 and you’re decide to do a short sale, you’d have to have at least $125,000 in other assets – without any other debts – not to be insolvent.
So if you have been considering doing a short sale, but waiting until this Debt Act is extended, lets chat if you think you will qualify for insolvency.
So lets say the Debt Act is not extended, there’s another significant exception to a homeowner’s obligation to pay taxes upon a deficiency waiver – insolvency. If you’re insolvent, as defined by IRS Code, then you have no tax liability on any deficiency waiver. What does it mean to be “insolvent”? I’m no tax expert (and anyone in this situation should seek advice from an accountant). However, it’s simpler than it sounds – you’re insolvent when your total debts exceed the total fair market value of all of your assets. Yes, “assets” includes everything you own. Most homeowners don’t have enough assets, so they’ll fit the bill. Just think about it. Using my example, above, if your house is worth $175,000 and you owe $300,000 and you’re decide to do a short sale, you’d have to have at least $125,000 in other assets – without any other debts – not to be insolvent.
So if you have been considering doing a short sale, but waiting until this Debt Act is extended, lets chat if you think you will qualify for insolvency.
