Soon homeowners facing a short sale or foreclosure may have to pay federal income tax on any portion of the loan that is forgiven unless Congress intervenes.
The Mortgage Debt Relief Act Congress, passed in 2007, is set to expire at the end of the year. For the past five years, qualifying homeowners who conducted a short sale, had their home foreclosed on, or restructured their mortgage, AND had part or all of the deficiency forgiven, didn't have to pay any income tax on the forgiven debt.
But starting in 2013, homeowners who short sell their $150,000 home for $120,000 will have to pay taxes on the $30,000 worth of debt that was forgiven, because the federal government considers it income, even though homeowners never actually put any of this "phantom" income in their pockets.
Several legislators have introduced bills in both the House and Senate that would extend the tax relief. The senate bill introduced by Democratic Senator Debbie Stabenow of Michigan would extend tax relief through 2013, while a House bill sponsored by Republican Representative Tom Reed of New York would extend the relief a year and another bill sponsored by Democratic Representative Charles Rangel, also of New York, would extend it two more years.
Though the three bills vary on how long they will continue the tax relief, they are all nearly identical in their goal to keep forgiven debt from a short sale, foreclosure or refinancing untaxed. All three bills have gone to committee. If the House and Senate are unable to come to an agreement, millions of homeowners could potentially wind up paying income tax on their mortgage deficiencies.
If you are upside-down on your house and are wondering what you should do…call us fairly soon so we can go over your options. If this bill (mentioned above) does not get extended for some reason, it could be a huge blow to your tax liabilities is you do a loan mod, get foreclosed on or decide to short sell.
Thanks for reading…Steve Jackson
561.602.1258