Homeowners stuck between a rock and a hard place were spared the fiscal cliff with the 11th hour budget negotiations.
Those struggling to make their mortgage payments and are upside down (have less than zero equity) in their home, can still sell their home tax free. That is, the provision in the Mortgage Debt Forgiveness Act of 2007 that excludes the debt forgiveness (the amount of the mortgage that cannot be paid off) from ordinary income has been extended through 2013. The exclusion is for the sale of a principal residence.
To illustrate the consequences if the budget deal went the other way, imagine if a home was worth $300,000 less than the mortgage balance. Even if the bank discharges the debt through foreclosure, they will file an IRS 1099 form in the name of the borrower for the $300,000. The IRS will treat the $300K as realized ordinary income. In this scenario, a homeowner will have to prove insolvency by filing bankruptcy in order to avoid the tax.
Short Sales comprised approximately 22 percent of the real estate activity in Agoura and Agoura Hills over the last twelve months. Short Sales offer advantages to a homeowner over letting the bank foreclose. In exchange for the homeowner handling the sale of the home via a short sale transaction, the banks are often willing to allow other judgements to be paid off, offer relocation expenses, and allow a more satisfactory credit reporting.