Short Sale Tax Relief

Homeowners who had short sales in 2015 are about to get big break on their taxes, thanks for a massive federal spending bill that’s about to be signed into law by President Obama.

In a short sale, the lender typically must accept a reduction in the mortgaged amount, so the borrower can sell the home at a lower price and get out of the loan without going through a foreclosure.

Under normal tax law, any forgiven debt is treated as income for tax purposes. That means that if a homeowner is able to reduce the principal on a home loan or complete a short sale, they would have to pay taxes on whatever debt was forgiven.

The Mortgage Debt Forgiveness Act was set to expire at the end of 2015, and without an extension, any mortgage forgiveness achieved in a short sale would have been counted as income for homeowners whom banks allowed to sell their homes for less than the amount of their mortgage during 2015.

The bill will extend short sale tax protection through 2016, including retroactively for the entire 2015 tax year.

Anyone who is still facing an underwater mortgage and considering a sale of the primary residence in the future may still wish to consider whether to complete the sale in 2016 (or at least, enter into a contract to sell in 2016) to avoid potentially unfavorable tax consequences in 2017.