As part of the law passed as a last minute escape of the so-called fiscal cliff, Congress extended the Mortgage Forgiveness Debt Relief Act to the great relief of homeowners who’ve suffered foreclosure.
Injury, but Not Insult
First passed in 2007, the act allows mortgage holders to avoid paying income tax on the value lost when they are forced to sell their homes at prices below their market value. Normally, the IRS considers that lost value as a break on the mortgage still owed, and thus as taxable income.
The act’s expiration at the end of 2012 was seen as adding insult to injury, as people who’d already suffered the loss of their homes would then typically owe income tax on tens of thousands of dollars.
The fear that the mortgage crisis could reignite was a major factor in Congress’s decision to grant the extension, which is in effect through the end of 2013, according to news reports.
“It’s a welcome relief for homeowners who are currently in the process of a short sale or a deed in lieu of foreclosure,” says Todd B. Allen, a real estate lawyer with Goede, Adamczyk & DeBoest, PLLC in Naples, Fla.
Shorts Sales, Deeds in Lieu Covered
Short sales occur when a home is sold for less than the principal balance of the mortgage, according to a Citibank discussion of foreclosure. “Typically in a short sale, the homeowner is experiencing a financial hardship,” says Citibank, “and the property may be listed for sale at less than what is owed on the existing mortgage.”
A deed in lieu of foreclosure is a legal document in which a homeowner signs over property ownership and is released from a mortgage.
“Homeowners can now rest knowing that any forgiveness of debt on their primary residence will not be a taxable event,” Allen says. “It’s a light at the end of an otherwise gruesome tunnel.”
But the light might be short-lived. “This key tax break was only extended for another year, so if you are just thinking about a short sale, I urge you to start the process immediately,” advises Roy Oppenheim, a real estate lawyer in Fort Lauderdale.
“Despite their name, short sales remain a time-consuming process and I don’t expect loan forgiveness to be extended again,” says Oppenheim in a blog post about the extension. “When Dec. 31, 2013, comes around, I believe mortgage debt forgiveness will become a thing of the past.”Tagged as: fiscal cliff, income tax, IRS, mortgage crisis, Mortgage Forgiveness Debt Relief Act of 2007,short sale