Short sales less attractive without tax break on forgiven mortgage debt

The expiration of a tax break that since 2007 has exempted debt forgiven in a short sale or deed-in-lieu of foreclosure from being counted as income could limit the options of an estimated 6.4 million homeowners who are still underwater.

More than 250,000 Americans were able to negotiate short sales last year, the New York Times reports. But if they’d had to pay taxes on the debt forgiven — $37,000, on average — that would have translated into an extra $9,250 in taxes for those in the 25 percent bracket, RealtyTrac’s Daren Blomquist estimates.

Ironically, banks will be able to write off debt relief that they are providing under the terms of legal settlements, but the homeowners who get that help will have to treat it as taxable income — unless lawmakers reinstate the tax break, as they have in the past.

The fate of legislation that would reinstate the exemption is uncertain — it costs the government $1.3 billion a year to provide, and some lawmakers are pushing for a broad overhaul of the tax code that would eliminate many deductions. Source: