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The real estate boom appears to be over for now.

Morgan Stanley predicts that house prices could fall by 10 percent by the end of 2024, perhaps twice as much in a worst-case scenario. Homeowners who purchased their homes at the top of the market could be in trouble, especially if the U.S. falls into a recession.

No homeowner wants to go through foreclosure and its credit rating destruction. Fortunately, there is an alternative: a short sale.

In a short sale, homeowners sell their home in a regular sale through a real estate agent for less than the amount of their mortgage. The lender accepts the sale proceeds, releases the mortgage lien on the property, and typically writes off the remainder of the loan as an uncollectible debt.

Lenders agree to short sales only where it’s clear that
• the home is worth less than what the homeowner owes, and
• the homeowner is financially unable to keep up the mortgage payments due to job loss, health issues, death, or other hardship circumstances.

Typically, a short sale involves forgiveness of part of the mortgage debt owed by the homeowner. Debt forgiveness can constitute taxable income to the borrower. Whether the debt forgiven in a short sale is taxable income depends on several factors, including whether
• the mortgage is a recourse or non-recourse loans
• the forgiven debt qualifies for the qualified principal residence indebtedness exclusion, or
• the homeowner was insolvent at the time of the debt cancellation.

Forgiveness of a non-recourse loan (a loan for which the borrower is not personally liable) does not result in taxable income to the borrower. Twelve states allow only non-recourse home loans.

But recourse loans are standard practice in the other 38 states.

Fortunately, for underwater homeowners who have recourse loans, Congress passed the Mortgage Forgiveness Debt Relief Act in 2007. Thanks to this law, up to $750,000 of “qualified principal residence indebtedness” forgiven by a lender is excluded from tax. This exclusion remains in effect through 2025 and applies only to debt to acquire or build the taxpayer’s principal residence.

Homeowners who don’t qualify for the qualified principal residence indebtedness exclusion can still avoid paying tax on their canceled indebtedness if they were insolvent when the debt was canceled. Taxpayers are insolvent if their total liabilities exceed the fair market value of all their assets immediately before the debt cancellation. It’s likely that most homeowners who can get their lenders to agree to a short sale qualify as insolvent.

I am hosting a webinar titled, "How To Protect Yourself From The IRS & Resolve Your Tax Debts!". You can get free tickets for this event, which will be held on the 1st of each month for 6 months starting February 1st. Click the URL to get FREE! tickets: https://www.eventbrite.com/e/how-to-p... or by searching Eventbrite.
Hey, my name is Wayne Scully, owner of W. SCULLY, CPA, PC, and I am a tax and business strategist. Our focus is to provide solutions to landlords, flippers and real estate pros in the NY Tristate area. My firm offers tax compliance, business consulting, and high value tax planning strategies to save thousands of dollars.
Wayne migrated from Jamaica in the 1990s; now lives in Queens, NY. He enjoys biking, running, & strength training. He is a proud father of one.
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TAX PROBLEM SOLVED:    • Another IRS Tax Problem Solved!  
Tax Resolution Overview by Wayne:    • Tax Resolution Overview by Wayne  
Owe Back Tax:    • Owe Back Taxes  

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The Black Pros On Money, Honey! is a frank discussion that provides the best information on Tax Strategy, insights for financial literacy, and developments in the technology behind these sectors. Each week, you hear first-hand accounts from seasoned practitioners, who provide no-B.S. answers to your biggest questions, new perspectives on how professionals create narratives that address tax/financial issues, or just simple information to keep you informed & proactive when it comes to money matters. Welcome to the show in the know, “Where none of us are smarter than all of us.”
00:00 Introduction
00:24 Morgan Stanley
01:03 Short Sale process
01:30 Eligibility
01:58 Cancellation of debt income
02:08 Taxability of forgiveness
02:26 Non recourse loans
02:46 Mortgage Debt Relief Act
03:43 Insolvency
04:01 Outro