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Short sales doomed?

Posted by Scott Van Voorhis  November 5, 2012 09:21 AM

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If you are thinking about selling your house through a short sale, you may already be too late.

That, anyway, is the message of doom that real estate agents in Greater Boston and around the country have been spreading as the legislative clock winds on the federal Mortgage Forgiveness Debt Relief Act.

The federal tax break, first passed in 2007, has made short sales a viable option for struggling homeowners. Now it's set to expire Dec. 31.

OK, given the mess down in Washington, it's anyone's bet whether Congress gets around to extending it before then or simply decides to let it expire. After all, there is that little thing called the fiscal cliff up ahead and it looks scarier by the day.

For anyone in the middle of a short sale of thinking of one, having to pay taxes on it is no small matter. In fact, it could be a deal killer.

Let's say you have a $400,000 mortgage on your house but can't get any buyers at that price, so you have lowered it to $350,000. If the IRS break on short sales expires, that $50,000 difference will be counted as income you have to pay taxes on.

That could be quite a wallop, especially if you are already in over your head on a mortgage and looking for an escape hatch.

Yet, if you find yourself stuck in this situation, you are not totally without options.

If you can prove to the IRS that you insolvent - more debt than assets - you may be able to wiggle free. Ditto if you have declared bankruptcy.

That said, the Mortgage Forgiveness Debt Relief Act provided homeowners faced with doing a short sale or getting foreclosed on a sturdy backstop.

And right now, with about 16 percent of Massachusetts homeowners still underwater, that's no small thing.

This blog is not written or edited by Boston.com or the Boston Globe.
The author is solely responsible for the content.

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About boston real estate now
Scott Van Voorhis is a freelance writer who specializes in real estate and business issues.

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