Many of us who are in real estate thought it wouldn’t happen, but in a blow to homeowners who are working their way through short sales, Congress did not extend The Mortgage Debt Relief Act of 2007 beyond 2016.
It expired on December 31, 2016 and underwater homeowners lost a huge tax benefit to help them regain their financial footing.
Generally, the amount of any cancelled debt is taxable as ordinary income, including mortgage debt cancellation.So if you’re working on a real estate short sale, consider the income tax consequences.
Don’t Be Caught Short
With the expiration of this Act, homeowners are left out in the cold and left with a potentially with a big tax bill for short sales in 2017 and thereafter.
There may be an exception available to you if you signed the short sale deal in 2016, even if the transaction closes in 2017. But new short sales entered into in 2017 are no longer covered by the expired legislation.
Be sure to check with your accountant so that you know the tax consequences of any mortgage debt cancellation. Debt cancellation is taxed at the ordinary income tax rates, not the capital gains tax rates.