Big tax bills for short sellers? Bankruptcy could come to the rescue

michelle-singletary_114x80It’s the middle of January 2014, and there still has been no movement by Congress in Washington to re-enact the Mortgage Forgiveness Debt Act, which expired at the end of 2013.

That’s bad news for people looking to get out of real estate by a short sale (and for people being forced out of it through a foreclosure) because un-recouped money in these sales will now trigger phantom tax income on next year’s tax returns. If $100,000 of debt is “forgiven” for example, and it throws the debtor into the 28% tax bracket, he’ll be asked by the IRS to pony up $28,000 in cash to pay tax — nothing like kicking someone who is down!

National columnist Michele Singletary (top left), always a smart writer on finance matters, thinks this tax break needs to be restored immediately — or else the fragile housing recovery stands a chance of cratering again.

But closer to home, Maryann Little, a broker who handles many short sales transactions, see the outlook for re-enacting the law any time soon as “bleak.”

The short term solution may be for more short sellers and foreclosure victims to take a trip to bankruptcy court. Although a painful step for many, a bankruptcy offers an ironclad solution to the phantom debt problem — individuals who can show they have filed for bankruptcy never need pay the extra tax on cancellation of debt income.

by Doug Beaton

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