Congress Passes Extension of Mortgage Debt Forgiveness

Congress just passed the new budget, and there is good news for homeowners who went through a short sale in 2015, or who may be involved in a short sale in 2016.

Normally, when a lender forgives your debt during a short sale, it is considered ordinary income to you.  For example, let’s say you owe your lender $150,000, but you go through a short sale and all your lender gets is $100,000.  In that situation, your lender would typically forgive the balance of $50,000.  However, that $50,000 would be income to you, taxed at your ordinary marginal rate.  Congress had passed a law so that you would not have to pay tax on debt forgiven by your lender in a short sale, but that law expired at the end of 2014.  If your short sale didn’t close until 2015, you were not entitled to the tax benefit.

Now Congress has agreed not to tax mortgage debt forgiveness on short sales not only in 2015, but in 2016 also.  So if you were holding back, afraid of the tax consequences of a short sale, it’s time to jump in and get your home sold and closed before the end of 2016!