Do you owe more than your house is worth? Go ahead, walk away from your mortgage. Professor Brent T. White’s new article on the housing crisis advocates doing just that in order to save yourself hundreds of thousands of dollars in the long run. Your credit score may be damaged, but as long as you manage the rest of your creditors well, you can have a good credit score within 2 years after foreclosure. In several states, mortgage lenders do not have many rights to pursue defaulting homeowner’s assets beyond the house itself. Don’t get hung up on the emotional aspect of a default but instead pay attention to the powerful financial benefits.
Did you know that most homeowners that strategically default on their mortgages are those with high credit scores when they apply for a loan? Strategic defaults are business decisions that people see as the most practical solution under their circumstances.
Debt cancellation is an option when short selling your home. The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.
If you borrow money from a commercial lender and that lender cancels the debt, you may have to include the cancelled amount in your income taxes. When you originally borrowed the money, it was not included your income taxes since you were required to pay back the lender. Once it is cancelled, that debt is now counted as income since you no longer have an obligation to repay the lender. However, with the Mortgage Forgiveness Debt Relief Act of 2007, not all forgiven debts are taxable.
The Mortgage Forgiveness Debt Relief Act allows some forgiven debt from your principal residence to be excluded from income. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief. Debt used to refinance your home qualifies for this exclusion, but only to the extent that the principal balance of the old mortgage, immediately before the refinancing, would have qualified. For more specific information on this, see Publication 4681. There is a limit on the amount of forgiven debt from a principal residence that can be excluded from your income. The maximum amount you can treat as qualified principal residence indebtedness is $2 million ($1 million if married filing separately for the tax year), at the time the loan was forgiven. This excluded debt must be reported on your tax return on Form 982. More information on all of these proceedings may be found at the IRS’ site for the Mortgage Forgiveness Debt Relief Act. This special relief is active through 2012.
Short Sale Presentation - Outlines the entire Short-Sale Process