Are Short Sales Doomed in 2013

There appears to be considerable speculation that the IRS Mortgage Forgiveness Debt Relief Act will not be extended by Congress prior to its original expiration date of 12/31/2012. I tend to agree with this position; however, there appears to be some kindling this week in Congress regarding this issue to take action.

Just what is the IRS Mortgage Forgiveness Debt Relief Act of 2007?

In simple terms, if you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be taxable. The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure or short sale may qualify for relief.

I think the real question should be “Does It Really Matter”?

Since I am not an Attorney nor CPA or Financial Advisor, my first response would be to seek advice from one of the above that has knowledge and expertise with this area of tax law. However, in speaking with numerous local real estate attorneys and CPAs, there appears to be a consensus that for a large number of short sale of foreclosure transactions, there may not be any taxable event from the IRS even if the IRS Debt Relief Act expires this year.  One viewpoint expressed is because Arizona is an Anti-Deficiency State, there may not be any deficiency, therefore there is no debt forgiven, therefore there is no taxable income. Another viewpoint expressed and one I’m most in tune with, is the IRS definition of Insolvency, (different than in bankruptcy), which may cover many short sales or foreclosures. This position is that at the time of the event – short sale closing or foreclosure, the property was insolvent and therefore there is no taxable event.

In either case, I do not belief in the event of a foreclosure or short sale, homeowners are going to be automatically faced with paying the IRS large sums of money if the Debt Relief Act is not extended. Our challenge is to counteract all the misleading information that has and probably will continue to be promoted by the various media publications.

 I guess the best thing would be to get the Act extended and then everyone can live Happily Ever After!! Good luck.

Written by Ken Ryan – Long Realty Short Sale Facilitator:

Ken Ryan is a native Tucsonan with over forty two years in the real estate industry.  Twenty nine of those years were as a homebuilder/developer and fourteen years as an associate broker. Ken was a Branch Manager with Long Realty for eight years and recently semi-retired to begin a new position with Long as Long Realty Short Sale Facilitator. In this new position, Ken researches, updates, communicates and trains Long Realty agents regarding short sale programs, issues, solutions and strategies. Ken is the Co-chair of the Short Sale resource Committee for Long and has been a member of the AAR Professional Standards Committee for five years


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