Since the financial crisis, the short sale market in Las Vegas has exploded. Many people looked to short sale as a way to avoid a foreclosure or bankruptcy. However, there may be a new obstacle on short sales.
At the beginning of the financial meltdown, congress passed a measure known as “Mortgage Forgiveness Debt Relief Act.” Prior to this act, if you short sold a home, or allowed that home to go into foreclosure, you could be taxed on the difference between the amount you owed on the home and what the home sold for. For example, if you owed $150,000.00 on a home, and it sold for $100,000.00, the IRS would treat this as if you had made an extra $50,000.00 that year and require you to pay taxes on that as if it were income. The Mortgage Forgiveness Debt Relief Act modified this so that you would not pay taxes if you short sold or had a foreclosure on your primary residence.
The Mortgage Forgiveness Debt Relief Act was not permanent measure. The act requires renewal, and technically, the act has lapsed effective December 31, 2013. Previously, this act was swiftly renewed, however, months into 2014 it remains unrenewed and may be permanently expired. There does not appear to be any consensus in congress on whether this relief should be extended. This means if you plan on short selling your home now, you may face taxes on it when you file next year.
If you are concerned about tax liability, you may want to look at filing a bankruptcy instead of a short sale. Debts discharged in Bankruptcy are not taxable, and if you file your case before a foreclosure, you may be able to escape potential liability for taxes.