Since 2007, when the housing market crashed, Congress created an exception to the normal rule.  The normal rule is that if a mortgage lender forgives some of the debt on your house from a short sale or “deed in lieu of foreclosure”, you, the one who is forgiven the debt, have to pay taxes on the amount forgiven.  In 2007, Congress relieved homeowners of that debt, if it was on the house they lived in as their principal residence.

That exception expired on December 31, 2013.  Unless Congress decides to extend it retroactively, homeowners who are forgiven debt on their home will again have to pay taxes on the amount forgiven.  See this article from the NY Times. 

The lesson here—look before you leap!  One of the advantages to short-sale or giving your house back to the bank was to eliminate the debt, without tax.  Now, you will have to pay taxes on the amount you are forgiven. So, if you are forgiven $100,000.00; you might have a huge tax bill to show for it.

If you give up your house and file for Chapter 7 or Chapter 13 bankruptcy to eliminate the debt, you won’t owe income taxes on the debt that is eliminated.

Consult with a tax advisor before trying to short-sell.  Tax laws change all the time, so it is best to know before you try to short sell. Also, banks have been more and more reluctant to agree to short sales.

Consult with a bankruptcy lawyer too!  Call us, we can discuss all of your options and come up with the best one for you.  Also, look at my recent article for more information:  Which is better,  Short Sale or Foreclosure after Bankruptcy?

Daniel J. Winter

BankruptcyLawChicago.com

djw@DWinterLaw.com

312-789-9999

Offices in Chicago, Gurnee, Oak Lawn, and Chicago, Illinois