Mortgage Forgiveness Debt Relief Act Extended
As American taxpayers waited anxiously to see if Congress could come to some sort of agreement in regards to the impending fiscal cliff, real estate agents were waiting on news of the Mortgage Forgiveness Debt Relief Act that was set to expire on January 1, 2013. The Act was put into place in 2007 to help consumers who had to short sale their principle residence or had received a reduction in their mortgage principle. To qualify for the debt relief the debt must have been used to buy, build, or substantially improve their principle residence AND be secured by their principle residence. The maximum amount that can be ”forgiven” is up to $2million.
In layman’s terms, if the amount owed to a lender was $300,000 and the amount the home sold for was $200,000, there is a $100,000 deficiency. Before 2007, this deficiency amount ($100,000) could be taxed by the IRS as additional income to the borrower. In most cases, this additional “income”puts a person in a higher tax bracket, thus increasing their taxes due at the end of the year. Many consumers would have to file for bankruptcy or face huge tax bills, fees, and fines, on top of the immediate implications of principle reduction or short sale. Had the Act expired, short sales would have lost their appeal to underwater home owners, thus eliminating a way of avoiding foreclosure.
So, yay! There is some good news attached to the passing of the American Tax Payer Relief Act. We have 362 more days to short sale a principle residence without IRS tax implications. Keep in mind that short sales are a long process and can take upwards of 6 months to negotiate. If you are interested in exploring this option to help avoid foreclosure, you need to contact a qualified real estate agent very soon. As the economy recovers, there is less and less of a chance that this benefit will be extended.