Is 2012 your last chance to qualify for a cancellation of debt exclusion?
Homeowners who have been waiting for their mortgage holders to start the foreclosure process for their delinquent mortgages might want to seek a short sale of their residence soon. The exclusion from federal taxable income for cancellation of debt secured by a principal residence is scheduled to expire after 2012.
“Homeowners have more control over the timing of a short sale than for a foreclosure,” says Michael Gray, CPA. “The banks have years of backlogs for foreclosures. By the time they get to yours, it might be too late!”
The exclusion for up to $2 million of cancellation of qualified debt secured by a principal residence was originally enacted in the “Mortgage Forgiveness Debt Relief Act of 2007 and extended by the Federal Bailout Legislation passed on October 3, 2008. Unless Congress takes action, the exclusion is scheduled to expire after 2012.
The laws for short sales and foreclosures vary from state to state. On July 11, 2011, California enacted legislation that provides better liability protection for short sales than foreclosures. A first or junior lender who approves a short sale of residential property with up to four units can’t pursue the borrower for any deficiency after the short sale is completed.
Michael Gray is the author of the Real Estate Tax Handbook, and Michael Gray, CPA’s Real Estate Tax Letter. He speaks and writes extensively on real estate tax issues. To interview him, call 408-918-3161.
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- Michael Gray, CPA
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