Mortgage Forgiveness Debt Relief Law Extended

Good news.

According  to reliable sources, the late night deal to avert the fiscal cliff included an extension of the 2007 Mortgage Forgiveness Debt Relief Act which was to expire at midnight last night. According to the National Association of Realtors, and confirmed by the text in the screen shot of the bill:

Of most interest to real estate, the bill would extend mortgage cancellation relief for home owners or sellers who have a portion of their mortgage debt forgiven by their lender, typically in a short sale or foreclosure sale for sellers and in a modification for owners. Without the extension, any debt forgiven would be taxable, which, for underwater households, represents a financial burden.

Here is the clause referred to in the quote above:

Mortgage Forgiveness Debt Relief Act Extension

The full text of the American Taxpayer Relief Act of 2012 can be found here and here. I know a number of home owners and colleagues in the industry who were concerned that the law would not be extended or languish in ambiguity until a retroactive extension, neither of which would have been particularly good.

There are details which are best discussed with your CPA and other professional financial adviser, and no broker like myself gives tax advice, so do consult with your accountant or lawyer. If you need a referral to a CPA or attorney familiar with the law, send me and email and I’ll be happy to put you in touch.

Bottom line: The business and tax ramifications of doing short sales did not change from the past 5 years, and if you are in the process of a short sale or considering one, a significant obstacle has been cleared. We can all exhale.

Update: Deal has been approved by both Congress and the Senate, and the President has signed it into Law.

 

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Will I Have to Pay Taxes After a Short Sale?

The concern of some homeowners looking to do a short sale that a 1099 issued from the bank will expose them to a new problem, namely a huge income tax bill on the forgiven debt, is understandable. With home values in Westchester in 2010 at a median of $630,000, a six figure 1099 is entirely possible. In the past, a bank could issue a 1099 for forgiven debt, rendering it akin to income for tax purposes.

However, even if the bank does issue a 1099, the likelihood that you’ll have a tax problem is virtually nonexistant for owner occupants thanks to a law passed in 2007, the Mortgage Forgiveness Debt Relief Act. From the IRS website:

The Act applies only to forgiven or cancelled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes. In addition, the debt must be secured by the home. This is known as qualified principal residence indebtedness.

Most definitions of “principle residence” mean that you have resided there for at least 2 of the prior 5 years. That means that if you move out due to a job transfer or or other reason, you are not out of luck. Obviously, as a licensed real estate broker I do not give tax advice. You have to consult a tax professional like a CPA. However, make sure you discuss this law when you speak. It runs through 2012, and may well be extended.

 

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