For many Arizonans with an underwater mortgage,completing a short sale or foreclosure before the start of next year is essential to take advantage of a large tax benefit set to expire at the beginning of 2013.
Ordinarily any debt forgiveness received is treated by the IRS as income to the debtor – you.Â This means you are viewed by the government to have received the same amount of money to your income as was canceled in your debt.
Example: If you owe $200,000 on your home and the bank recovers $100,000 through short sale, foreclosure or Trustee’s Sale you may still owe the difference unless the bank cancels the remaining $100,000 debt.Â If the lender forgives your balance (by either agreement or state law), the Tax Code says you also received $100,000 of income on which you must pay taxes. (Note there are exceptions to this law so contact us to reviewÂ your individual scenario).
For most, if not all, people having to pay an added tax bill of between $20,000-$30,000 in taxes as a result of that income is staggering.Â Fortunately the Mortgage Forgiveness Debt Relief Act of 2007 makes it possible for many homeowners to avoid paying income tax on the canceled debt they may have received after being foreclosed on or completing a short sale.Â Now there are a few qualifications:
1. Homeowner must have completed the short sale or foreclosure BEFORE 2013
2. The property must qualify as the tax payer’s “principle residence.”Â A “principle residence” is different than a “primary residence.”Â Whereas a primary residence is the property where the homeowner currently lives, a principle residence is one the homeowner lived in during 2 out of the last 5 years.
3. Homeowners may only claim up to $2 million of this debt cancellation, meaning most struggling homeowners will no need to worry about the cap.
Attorneys at the Wells Law Group can help you answer the questions, “should I stay or should I go,” “does it make sense to stay here any longer,” “how can I move on with my life,” by meeting with you in a private and FREE consultation.*Â We are here to help take the STRESS out of the DiSTRESSed homeowner.Â Contact us today or fill out the information to obtain your free, no obligation report showing how much your home is worth and how long it will take you to break even in your property.