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Tax break ending for homeowners facing forclosure

A home is considered to be financially underwater when the balance of the home loan is higher than the fair market value of the property. One estimate places the number of underwater homes in the United States at nearly 11 million. That figure is higher than the total population in 43 U.S. states. A government tax break relieving homeowners of a significant tax burden for seven years has allowed many people in this situation to avoid foreclosure. However, that measure expired at the end of 2013, and without action from Congress, underwater homeowners could see a huge tax bill this year.

Short sales have become a popular method of escaping the threat of foreclosure. A short sale allows underwater homeowners to work with attorneys or their lenders to help them sell the house for less than the amount owed. However, the credits and deductions that have dissolved as the Mortgage Forgiveness Debt Relief Act expired may make this option less helpful. For example, a homeowner that has a mortgage of $100,000 might be able to short sell their home for $75,000. The IRS would then consider the $25,000 saved by the homeowner to be income. If the $100,000 is canceled because of the short sale, however, the homeowner could see a large tax bill for income that they never really had.

Short sales have helped over 220,000 homeowners avoid foreclosure since 2009. The fear now is that if Congress does not renew the tax breaks, short sales may be less of a viable option. One realtor commenting on the situation stated that people with no access to debt relief may choose to surrender to foreclosure rather than explore other options.

There is hope, however. Congress is currently looking at three bills that could extend the tax breaks. Also, regardless of what Congress ultimately decides to do, a short sale may still be a better option than foreclosure. Any resident of South Carolina that has an underwater mortgage should discuss alternatives to foreclosure with a professional that can assess the taxes that may be involved.

Source: usfinancepost.com, "Tax Break for Underwater Homeowners Ending, May Slow Short Sales Read more at http://usfinancepost.com/tax-break-for-underwater-homeowners-ending-may-slow-short-sales-11605.html#EcIFWFrF6qzFp0fY.99" Christine Layton, Dec. 31, 2013

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