Short sales can be complicated

Q: I have been thinking about short-selling my house. I see billboards all over the place that say I can short sale the house and buy it back. Is that true?

A: This is an important question, considering there are more than 2,800 active short sales on the market.

The short answer is yes, but programs that offer this option are heavily governed and restrictive.

First of all, for the bank to approve a short-sale, generally you must demonstrate a financial hardship preventing you from remaining in the home. Second, you must exhaust all available options and show you do not qualify for other programs designed to keep you in the property.

In short, if you owe more than the property is worth and cannot afford to continue to own the home, a short sale may be an option, providing your lender agrees to a short payoff of the loan. Qualifying for a buyback option is another matter, and I suggest you contact a real estate professional familiar with short sales to see if you meet the conditions of the federal HAFA program. The HAFA program contains a short-sale/lease-back and option to repurchase the property within one TO six years following a short sale.

It is important to note there are income tax and credit implications for engaging in a short sale. The good news is that on Dec. 18, President Barack Obama signed a bill that extended the Mortgage Forgiveness Debt Relief Act through Dec. 31. The extension also retroactively covers mortgage debt canceled in 2015. Normally, debt that has been forgiven by a lender counts as taxable income. MFDRA prevents taxes on the amount of your home mortgage debt that had been forgiven. To qualify for the MFDRA, the home must be your principal residence for at least two of the previous five years and the debt must have been used to buy, build or make substantial improvements to the home. Contact your tax professional to see if you qualify.

— Michael Lewis, Realtor, broker, Synergy | Sotheby's International Realty