While the whole country breathed a sigh of relief that the fiscal cliff was averted, there is even better news for homeowners and sellers. Buried in the pages of the fiscal cliff deal is an extension of the Mortgage Forgivness Debt Relief Act of 2007. This act was put in place to help struggling homeowners avoid a huge IRS tax hit when they sell their home as a short sale.
In a short sale, deed-in-lieu of foreclosure, or foreclosure, a mortgage lender may forgive part of the mortgage debt owed if the secured home's value is less than the mortgage amount. Debt forgiveness is normally taxed as income by the IRS, but the Act excludes up to $2 million in debt forgiveness on a primary residence. The Act was set to expire at the end of 2012, but has now been extended through 2013. Given the current budget climate in Washington DC, it is unlikely the Act will be extended again.
Homeowners wondering about short sale of their home should check their home value in order to make a sound decision. If they opt for a short sale, sellers should act quickly to take advantage of the Act since short sales can take 4 to 6 months.