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The Tax Deduction for Short Sales: Expiration & Extention

The debt relief act of 2007 was extended as a result of the fiscal cliff of 2012

The Deduction Expired in 2012

Near the end of 2012, many homeowners were panicking because Congress did not renew the tax deduction for short sales that was provided for in the Mortgage Forgiveness Debt Relief Act of 2007. Many homeowners were rushing to close out on short sales before the end of 2012 to avoid having to possibly pay taxes within the new year. Within the first part of 2013, sellers were leery of going through with short sale transactions, since the deduction had expired and had not been renewed.

Fiscal Cliff Deal Extends This Tax Deduction

With many homeowners still struggling and facing foreclosure proceedings, the recent Fiscal Cliff deal that took place in the middle of January now has extended the tax deduction for homeowners on forgiven debt. The new legalese regarding this tax deduction includes the following language:

“SEC. 202. EXTENSION OF EXCLUSION FROM GROSS INCOME OF DISCHARGE OF QUALIFIED PRINCIPAL RESIDENCE INDEBTEDNESS.

(a) IN GENERAL.—Subparagraph (E) of section 108(a)(1) is amended by striking ‘‘January 1, 2013’’ and inserting ‘‘January 1, 2014’’.

(b) EFFECTIVE DATE.—The amendment made by this section shall apply to indebtedness discharged after December 31, 2012.”

Now homeowners can continue to take advantage of this tax deduction when they go through with a short sale. The extension to this deduction may help to fuel the increase in short sale transactions, which is expected for 2013. However, sellers should keep in mind that this act is still set to expire. Currently, the new expiration date is January 1, 2014.

Next: Chapter 7: Benefits of buying short-sale properties

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