The Mortgage Forgiveness Debt Relief Act has not been extended by Congress. What does this mean to you if you are trying to decide between a ‘short sale’ and letting the bank foreclose?
The president of our Realtor Board, Heidi Kasama, wrote an article for the Review Journal May 17, 2014. She reached out to local CPA Jason Payan, of Payan & Payan for his take on the question.
Mr. Payan said “While there are subtle tax differences between a sort sale and a foreclosure, by and large they are treated the same way for income tax purposes. The similarities are so much so that in general I tell people they are virtually the same from an income tax perspective.
…a foreclosure is oftentimes much worse than a straight short sale, the reason being, in a foreclosure the bank will usually accrue all the legal fees and foreclose fees to the price of your loan. This means that when you foreclose, you will have a significantly larger amount of cancellation of debt income to deal with.”
Many people believe Congress will vote later this year to extend the act retroactively but even if they do not, if your debt exceeds your assets the day before the short sale, you may not have to pay taxes on the forgiven or cancelled debt as you would be considered insolvent by IRS standards.