A short sale may cost you thousands!
Are you upside down on your home? Be warned that a short sale may NOT be in your best interest.
Uncle Sam is still giving homeowners until Dec. 31, 2012 to go through a short sale or foreclosure without tax consequences - as long as the lender officially releases the debt.
But on Jan. 1, 2013, the rules change: The amount a lender forgives, ether in a short sale or foreclosure, on a primary residence will be taxable on federal income taxes.
So if a house sold $50,000 short of what is owed on the mortgage, then the selling homeowners will owe federal income taxes on that $50,000. Homeowners would owe $12,500 if they're in the 25 percent bracket; $7,500 if in the 15 percent tax section.
Homeowners would be on the hook even if the house sold but the bank had not formally forgiven the loan in a letter: The banks must officially sign off in writing before Dec. 31.
The Mortgage Debt Relief Act of 2007 "generally allows taxpayers to exclude income from the discharge of debt on their principal residence," according to the Internal Revenue Service. "Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief." That relief will be ending this year.
Homeowners declaring bankruptcy could escape paying income taxes on any cancellation of debt income if the debt is forgiven in the bankruptcy.
Short sales can take a long time so you may want to consider if bankruptcy is your best option.