It is official, the Mortgage Forgiveness Debt Relief Act has been extended until January 1, 2014. This extension for another year has been much anticipated as it will help many homeowners avoid taxes on the debt forgiven in the process of a short sale.
The previous expiration date was December 31, 2012. Many homeowners with short sales in progress worried they would be liable for taxes on the forgiven difference between the amount their home sold for in a short sale and the amount owed on their mortgages. For example, if the home sold for the current market value of $250,000, but they owed $300,000, there is a $50,000 difference. If the Act had expired as anticipated homeowners in this example would be liable for taxes on this extra $50,000 of ‘income.’ Although the seller does not actually walk away from closing with $50,000, when the lien holder writes off the debt as a loss, to the IRS it must appear as a gain to someone. Therefore, it appears as a gain of $50,000 income to the seller. Depending on the seller’s tax bracket and amount of debt written off it could be an average of $7,500 to $12,500 in extra taxes.
Most homeowners who need to sell their home as a short sale do so because they have experienced a financial hardship which makes it impossible for them to continue payments on their mortgage; such as a job loss, reduced hours, or unexpected medical expenses. These sellers do not have funds to catch up on their mortgage and certainly do not have funds to pay extra taxes to sell their home.
This extension was a smart move for the government for several reasons:
- It will help many homeowners who have no other option than to gracefully exit their homes through the means of a short sale, thus avoiding foreclosure
- Currently inventory in Colorado is at all-time lows. This will allow many more homeowners to sell their homes as short sales adding to the inventory available on market.
- This will keep the Real Estate industry strong this year which in turn will positively affect the upward movement of the overall economic stability of the nation.
To read details of the Mortgage Debt Relief Act to go: http://www.irs.gov/Individuals/The-Mortgage-Forgiveness-Debt-Relief-Act-and-Debt-Cancellation-
To see where it appears in the full text of the bill to avoid the Fiscial Cliff CLICK HERE. Go to the bottom of page 25, section 202 to see where the bill extends the Mortgage Forgiveness Act of 2007.