Image from https://gocleancredit.com/
The housing market won’t be the same as in the last few years. Many experts predict housing prices will decrease by as much as 10% by 2024. This could be bad news for homeowners who borrowed a lot to buy their home, leaving them upside down (owing more than the home’s value).
Foreclosure isn’t something any homeowner wants to experience; fortunately, there’s an alternative – a short sale.
Here’s how it works.
You contact your lender to discuss your eligibility for a short sale. If they agree, they are a part of the transaction. You sell the home with a licensed real estate agent like normal; however, the amount you ask for the home may be less than you owe. Again, the lender is involved because they must approve the agreed-upon sales price.
Lenders allow short sales when they know the borrower is upside down and has financial issues that make it impossible to maintain timely mortgage payments.
When a lender accepts a short sale, they accept the sales proceeds, release you from the mortgage debt, and write off the difference as uncollectible.
There’s a catch, though.
The written-off debt is forgiven, which is taxable for you. Here’s what determines if the income is taxable:
- The loan is a recourse loan
If the loan is a recourse loan, the forgiven debt is taxable. Only 12 states are non-recourse states, leaving the rest subject to taxation.
- The forgiven debt falls under the Mortgage Forgiveness Debt Relief Act
Congress passed a law that allows forgiven debt of up to $750,000 in mortgage debt on a principal residence to be excluded from tax through 2025.
- You were insolvent when you sold the home
If you can prove your liabilities are higher than your assets when you cancel the debt, you may not be subject to taxes.
I know it can be confusing, and losing your home is a trying time. Contact us to discuss the tax implications to help you make a decision.