Las Vegas Mortgage Forgiveness on December 16, 2014, President Obama signed a bill that extended the Short Sale Forgiveness Debt Relief Act retroactively to cover mortgage debt cancelled in 2014.
- Exclusive Short Sale Tax Implications Information
- IRS “Insolvency Clause” Offers Tax-Saving Alternative
- Here’s an Example of How Short Sale Forgiveness Works:
Exclusive Short Sale Tax Implications Information
The Las Vegas Mortgage Forgiveness Debt Relief Act 2014 (MFDRA) prevents Las Vegas homeowners who went through a short sale from being taxed on the amount of their home mortgage debt that had been forgiven. Foreclosure help!
For Clark County Nevada homeowners to qualify for a tax break in 2014, their short sale must close by December 31, 2014.
Mortgage Forgiveness Debt Relief Act Extended Retroactively for 2014:
Future of Mortgage Debt Relief Uncertain in 2015
The Act has only been extended through 2014. Congress is expected to debate further extension of the Act as part of a larger tax package in 2015. In the meantime, mortgage debt forgiven by a lender in 2015 might count as short sale tax implications taxable income.
According to a brief from the National Association of Realtors (NAR), about 5.3 million homes are still under water. In addition, there are still more than 1 million homes in the process of foreclosure.
If the Las Vegas Mortgage Forgiveness Debt Relief Act 2014 is not extended further, hundreds of thousands of American families who did the right thing by short-selling their home will have to pay income tax on income they never received.
Call Robert Ratliff at Ratliff Realty Group with RE/MAX Las Vegas.
If you are underwater on your home mortgage and need to sell your house, what do you do now?
IRS “Insolvency Clause” Offers Tax-Saving Alternative
Short sale sellers can still be exempt from tax liability under the “insolvency clause” of the Internal Revenue Code. The clause states that a seller is exempt from paying tax on any forgiven debt to the extent that they are insolvent.
In other words, if the seller’s debts and liabilities exceed their assets by more than the amount of debt forgiven, they do not have to pay taxes on the forgiven debt.
Here’s an Example of How Short Sale Forgiveness Works:
A seller has a Las Vegas home valued at $300,000, but the mortgage debt is $400,000. We short sell the property for $300K and the bank elects to forgive the debt on the $100,000 shortfall amount.
Since debt that has been forgiven counts as taxable income, the IRS would treat the $100,000 of short sale forgiveness debt as income.
This is where the insolvency clause formula comes in. Begin by adding up all of your debts/liabilities in one column and all of your assets in another.
For this formula, the IRS wants you to include the mortgage debt as a liability, and the fair market value of your house as an asset. Let’s say you have $600,000 in assets and $700,000 in debts/liabilities. You are insolvent by $100,000.
Since your insolvency amount of $100,000 equals the short sale forgiveness debt amount of $100,000, it’s a wash and you will not have to pay taxes on that forgiven debt. You are shielded dollar-for-dollar on the amount of forgiven debt up to your insolvency number.
Let’s say you were only insolvent by $80,000. In that case, you would still have to pay short sale tax implications income tax on the remaining $20,000 of forgiven debt.
Las Vegas Mortgage Forgiveness
Short Sale Tax Implications