With the beginning of a new year, it is time for some homeowners who are struggling to make their mortgage payments to make a big decision.
Perhaps you are among them. With the Mortgage Debt Relief Act of 2007 set to expire December 31, 2012, if you are going to sell your home in a short sale, or allow your lender to foreclose on the home, now is the time. Wait until next year and it could cost you – big time.
More Short Sales & Foreclosures Coming
I am all for people staying in their homes, but I also realize that it isn’t always possible. This is particularly sad for those who have lived in the same home for a long time and have a lot of sentiment towards the home. But once this mortgage debt forgiveness from the government expires, homeowners will have to pay taxes on the difference in the amount that is owed on the home and the amount that the home sells for – since it will be counted as taxable income. Sure, you won’t be receiving the difference. But the IRS sees this forgiven debt as income anyway.
Let’s look at a scenario that might happen on January 1, 2013. Let’s say that you owe $250K on your property, and it sells for $150K. The difference is $100K. And that’s $100K in taxable income. Depending on your tax bracket, you could owe as much as $35,000 in taxes to Uncle Sam. Complete the same foreclosure or short sale prior to December 31, 2012, and none of the forgiven amount is taxable. Since short sales and foreclosure proceedings can take up to a year, now is the time to act if you want to avoid the repercussions of owing tax on income that you will never, technically at least, see.
Avoid Foreclosure? Or Not?
One question that I sometimes get asked by distressed homeowners is whether or not they should try to save their home, and avoid foreclosure. There is no easy way to answer that question. Many times, calling the lender and working out a plan to keep your home is just delaying the inevitable. While it is sometimes possible to refinance your mortgage and turn things around, if nothing changes in your situation, you need to take a good look at whether or not you can afford to stay in your home.
Is there reason to believe that your financial situation is going to improve? Did you get a new job? Will the new payment amount be in line with your budget? If everything is going to be basically the same, then this delay in the inevitable can end up costing you big time in 2013 when you have to count the debt you are forgiven as taxable income.
For many homeowners, getting out while they can minimize the damage is something to think about. Coincidentally, some housing analysts are predicting that this expiring tax relief will cause the number of short sales and foreclosures to go up this year as more and more homeowners look to get out from under their failing mortgage loans.
This article was supplied by Linda Wise who helps home buyers find great deals on Merritt Island real estate for sale. If you’re looking for a great deal, please check out her Titusville real estate for sale and Cape Canaveral real estate for sale pages where you can search all Florida homes on the MLS.