Tax Relief for Short Sellers

Since April 15 has just passed, many people who have lost their homes to short sales or foreclosures have found out the bad side to debt forgiveness.

Although the Federal Government passed debt relief in December of 2009, the California legislature waited until the last minute; finally passing the Conformity Act of 2010 on April 12. Since some tax preparers didn’t get the word, people may have filed returns or extensions believing that they owe a lot of money to the state and maybe even the Federal Government.

A little history, in the past, when a lender forgave or canceled part of the balance due on a loan, the borrower owed State and Federal income tax on the forgiven debt. Bankruptcy, non-recourse loans, and certain other events could keep this forgiveness from being taxed, but in general, the amount forgiven was taxed as income.

In December 2009, the Federal Government realized that this needed to change. They enacted the Mortgage Forgiveness Debt Relief Act. This Act made forgiveness of debt on your principal residence a non-taxable event. The Federal relief applies when the original loan was under $2 million dollars and the forgiveness occurred in 2007 through 2012. This Act can save people who qualify thousands of dollars in income tax. Of course, if you’re one of the people who might benefit from this relief, you need to consult your accountant or CPA to make sure that this applies to you.

On April 13, right before our tax returns were due, the State of California passed a similar law. There are two main differences. In order for the borrower to be exempt from tax on the forgiven amount, the maximum loan amount is $800,000, and the maximum forgiveness of debt is $500,000. The other difference is that the exemption applies to loans forgiven from 2009 to 2012.

Because the state relief occurred so recently, your tax preparer may not have known about it. If you’ve already filed your taxes, and missed this exemption, click on the following link to find out how to amend your return. California Mortgage Forgiveness Debt Relief Information

For additional information about the Federal Relief Act, check out this link: Federal Mortgage Forgiveness Debt Relief Act

And remember, we’re here to help you. We’re experienced in the San Jose real estate market. If you’re trying to decide whether now’s the right time to buy or sell, or if you need to sell, call us.

For more information about The Powers In Real Estate, Robyn McKeon Powers or Justin Powers, please visit our website: ThePowersInRealEstate.com.

Copyright Robyn McKeon Powers 2010