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End of important tax law leads homeowners to short sell quickly

When a person buys a home for more than it is worth, they can often feel trapped in the financial situation. After the housing market collapsed, for example, thousands of homes went underwater - that is, they were worth less than the value of their mortgage. Homeowners wishing to move away often turned to short sales as a way to escape the difficult situation.

Short selling is a method of selling the home by which the bank agrees to allow the home to be sold for less than the value of the mortgage. The bank then keeps the sale price and releases the homeowner from the mortgage. The homeowner benefits by avoiding foreclosure, and the bank benefits by quickly turning over the house. Short sales also allow the homes to remain occupied, which prevents home damage through vandalism or missed upkeep.

Short sales were extremely popular in the years immediately following the economic recession. In fact, they were helped along by an act of Congress: the Mortgage Forgiveness and Debt Relief Act. The MFDRA helped homeowners by exempting them for taxation of the debt forgiven in a short sale.

After a short sale, homeowners are often released from a large amount of debt. If a homeowner has a $200,000 mortgage, and sells their home in a short sale for $125,000, then the bank takes that amount and forgives the remaining $75,000.

Under U.S. tax law, however, that $75,000 is classified as income on one's federal taxes. The MFDRA exempted homeowners from having to pay this tax, but that law is due to expire in 2014, and it is unclear, so far, whether it will be extended.

As a result, some homeowners in South Carolina and across the country are pushing for their short sales to be completed by the end of the year to ensure that they can take advantage of the Mortgage Forgiveness and Debt Relief Act while it is still in effect.

Source: The Chicago Tribune, "Mortgage debt forgiveness will be taxable in 2014" Ilyce Glink and Samual J. Tamkin, Nov. 07, 2013

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