January 2, 2013 by 9 Comments

Rest easy if you’re trying to short sell your house – you won’t face a massive tax bill as a result if you complete the sale in 2013.

As part of the fiscal cliff deal, the Mortgage Debt Forgiveness Act of 2007 has been extended for one more year.  Under normal circumstances, debt forgiven as a result of a short sale or mortgage modification would count as income for tax purposes.  For instance, if somebody owes $250,000 on their mortgage and their lenders agrees to a $200,000 short sale, $50,000 in debt is forgiven.  This would have been taxable without an extension of the law.

According to RealtyTrac data, short sales made up 22% of all residential short sales in the third quarter of 2012, a 17% year-over-year increase.  A failure to reach an extension to this debt forgiveness law would have been deleterious to the nascent housing recovery.

At the end of the day, short sales are an important mechanism to clear negative equity from the housing market.  Although not totally benign, they tend to have less negative impact than foreclosure (which is probably the most destructive market clearing tool).

Update: I failed to link to the section of the bill that extends this act – my apologies.  Click here to see the full text of the bill.  Scroll to Title II – Individual Tax Extenders.  Under that heading, scroll to Section 202 – Extension of Exclusion From Gross Income of Discharge of Qualified Principal Residence Indebtedness, and you will see an extension through January 1, 2014.

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  • JasonKleibBroker@gmail.com' Jason Klein says:

    This is good news but the first I am hearinf this as Part of the deal to avoid the clif. Can you please site where this is part of the deal?

  • Sure, I’ve updated the post with a link.

  • clg4jesus@hotmail.com' Colette Gillingham says:

    AMEN!!! We just received our Short Sale approval this past Thursday and it included full debt forgiveness. We were releived and distressed all at the same time. A friend told me to look into the taxable situation since he had heard that it may not be as bad as we were imagining. Glad I did and fould this article since I was not aware of this Taxpayer Relief Act.

  • Congrats on completing the sale. I would still really strongly recommend you speak to your accountant or lawyer about your short sale to make sure you are in compliance with regard to taxes.

  • wingwen47@hotmail.com' sandi says:

    We had a short sale in October and as far as I know we are forgiven by the debt forgiveness act. I did get a 1099_c so
    I am still stressed about what to do with this form. Is there a site that can help me figure out how to make sure the debt is forgiven correctly when I file my taxes.


    Maybe someone can answer a question for me.
    I closed on my short sale in July of 2012.
    However both my 1st and second mortgages would only shotsale if I signed promissary notes, which I did. one was for 5000.00 and the other for 19000.00. I was expecting a 1099C this year (2013) for the written off amount. I never recived them. I called both banks and thay told me, once I complete paying the promissaty notes then they will be generated. Will I still be eligible for the Short Sale Debt Relief since the home closed in 2012 when this was available? The small promissary note 5000 will be paid off this year 2013. the larger amount 19000 will paid off in a couple of years. DJ?

  • siennamom@bellsouth.net' Danette says:

    Was there an amount on your 1099C?

  • fcna123@yahoo.com' Angie says:

    I hear that again would extend relief debt is that true???

    What woul happen if I do have an offer on my property it in October 2013 and closed the sale in January 2014 …. would have to pay taxes?
    I’m referring to a short sale

  • campbellml17@hotmail.com' Melissa says:

    My question is the same as Angie’s (July 19, 2013) the process for Short Sale for my house started in October 2013 as a short sale and closing is January 2014…. am I responsible for the taxes??

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