Many struggling homeowners were waiting to see what would happen with the Mortgage Debt Relief Act before making a decision on how to move forward in the New Year.
On Jan. 1, as part of the fiscal cliff bill, Congress passed a one-year extension of the Mortgage Forgiveness Debt Relief Act, which was set to expire this past Dec 31. The extension of this act, which has saved homeowners more than $1 billion in taxes, is great news for homeowners who are upside down on their mortgages.
What is the Mortgage Debt Relief Act?
Normally, when a debt is forgiven, it becomes income and is taxable. It is reported to the IRS by the creditor and must be included on your tax return. The Mortgage Debt Relief Act allows you to exclude the cancelled debt of purchase money on your principal residence, and you won’t be subject to any tax on the deficiency. You can find the complete Mortgage Debt Relief Act on my Web site at www.ArizonaShortSaleToday.com.
What is Cancelled Debt/Deficiency?
When a homeowner does a short sale, the bank is agreeing to sell the property for less than the amount owed, therefore, selling the home short. This will be an agreement between the homeowner and the bank. The remaining balance is the cancelled debt or the deficiency. In a basic example, if the current balance on the mortgage is $400K, and the house is sold as a short sale for $300K, there is a $100,000 deficiency. The borrower will receive a 1099C from the bank for $100,000, and it will be reported to the IRS. With the Mortgage Debt Relief Act, this $100,000 will still be reported on your tax return, but will not be taxable.
Eligibility
The cancelled debt must be for the purchase, building or substantial improvements of your principal residence. Maximum amount of forgiven debt is $2 million, or $1 million if married and filing separately. It does apply to refinance, but only if the previous mortgage would have qualified (which in most cases they do). It applies to debt reduced through foreclosures, short sales and loan modifications.
What this means to homeowners
Now that the Mortgage Debt Relief Act has been extended, homeowners who are upside down on their mortgage, facing foreclosure or considering doing a short sale, can move forward without worrying about any tax consequences on the deficiency. With this extension, and banks being more willing than ever before to work with homeowners to avoid foreclosure, there has never been a better time to do a short sale.
Contact me today for more information on the Mortgage Debt Relief Act and short sales, or for a free confidential consultation. You can call my cell at (602) 571-6799, or send an e-mail to Lorraine@ArizonaShortSaleToday.com. Visit my Web site at www.ArizonaShortSaleToday.com.