In an effort to avoid the fiscal cliff, Congress passed the 2013 AmericanTax Payer Relief Act. Included in it is a one year extension of the 2007 Mortgage Forgiveness Debt Relief Act through the end of 2013. This is good news and a relief to homeowners who may be in a short sale situation or considering it.
A short sale occurs when a homeowner is in default and needs to sell a home which is worth less than the mortgage amount owed . The difference between what owed at time of sale and amount actually receivde from the sale is called the deficiency. The sale price is subject to lender approval for the very reason that the bank or lender will be accepting an amount which is less than what is owed.
Prior to the Mortgage Debt Relief Act, the government viewed the debt forgiveness as income to the seller who then had to pay taxes on that "income" at the end of the year. To sellers facing this tax liability in addition to having to give up their home, the advantage to short sale over foreclosure might not be so clear.
The extension of the law allows borrowers to exclude the debt forgiven in a short sale from income. Thus the added stress of a looming and possibly large tax liability is removed making the short sale solution a more viable alternative to sellers facing hardship once again. The amount extends up to $2 million ($1 million if filing separately) of debt forgiven on a principal residence. As per Compass Point Research & Trading, "for homeowners to qualify, their debt must have been used to buy, build or substantially improve their principal residence and be secured by that residence".
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