January 4th, 2013 11:28 AM by Preston Ware
As part of late night negotiations to avert the fiscal cliff our government extended the 2007 Mortgage Forgiveness Debt Relief Act for another year. The Act, which was set to expire on 12/31/2012 helps homeowners avoid the cost of paying a huge amount of taxes when they short sale their homes. Due to the epidemic of short sales taking place across the country, this is big news for a lot of homeowners trying to move on with their lives.
The bill extends mortgage cancellation relief for home owners or sellers who have a portion of their mortgage debt forgiven by their lender, (settled for less than amount due) typically in a short sale or foreclosure sale for sellers and in mortgage modifications. Without the extension, any debt forgiven would be taxable, which, for underwater households, represents a huge financial burden.
For example, if John the homeowner owes $300,000 on a home worth $150,000 and decides to do a short-sale, he normally would receive a 1099 for $150,000. Assuming a 25% tax bracket that would create a financial obligation to the IRS of $37,500!
Under this relief, he still receives a 1099 to acknowledge the transaction but the homeowner is not taxed on that figure.
The relief act's extension has been viewed as vital to the recovering housing market. Short sales nationwide have been surging in anticipation of the exception's end on December 31, 2012. The Mortgage Forgiveness Act will now expire on December 31, 2013.
Every homeowner thinking of doing a short sale, a loan modification or even facing foreclosure when all else fails, should always consult with a professional tax expert, CPA or attorney to discuss their individual circumstance.
I on the other hand can help qualify future buyers of the home and can also refer qualified title agents who will help make the short sale process an easy one.