I just heard from Ed McFerran at MBS Law that the Mortgage
Forgiveness Debt Relief Act of 2007 has been extended by Congress. What this means is that if Congress had not extended the relief act homeowners would have to start paying income tax on the
portion of their mortgage that is forgiven in a foreclosure, short sale or a
principal reduction. For example if a homeowner owes $400,000 on their home and it sells for $300,000 at foreclosure or a short sale they could owe income tax on the difference of $100,000, the “deficiency.” At a 25% tax rate that could be a tax liability of $25,000. Considering that these
homeowners are already in distress and probably do not have the money to pay this tax anyway this is a "makes sense" provision of the tax code and is a benefit to distressed homeowners to help them get back on their feet.
If you have questions or concerns concerning how this may
affect you or anyone you know please feel free to contact me for detailed
discussion of the implications of the debt relief act.
Here is a copy of the e-mail from Ed McFerrin announcing
the tax relief provision.
CONGRESS EXTENDS FORGIVENESS OF DEBT TAX ONE MORE YEAR!!
This will probably be my shortest email to you this
year. The fiscal cliff legislation is
157 pages long. Section 202 that addresses
an issue important to those of us involved in assisting distressed homeowners:
income tax on debt forgiven.
At this juncture the legislation awaits the President’s
signature, but we are confident that the law that precludes certain income
taxes from those homeowners that sell their property “short” has been EXTENDED
ONE MORE YEAR until December 31, 2013. In short, most homeowners will not have
any tax to pay when they do a short sale.