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

This entry was posted in Bankruptcy News, Real estate, Secured loans, Taxes. Bookmark the permalink. Comments are closed, but you can leave a trackback: Trackback URL.
Call now: (978) 975 - 2608