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View Winners → Mortgage Debt Relief Act Expires in December 2012
Arcadia Weekly Sep 25, 2012
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Before the Mortgage Debt Relief Act, homeowners were liable for federal taxes on debt reduction they had negotiated with lenders. The process would go like this:
A homeowner finds that he or she can no longer afford their mortgage. At risk of default and foreclosure, the homeowner is able to negotiate with the bank an option that avoids foreclosure
(most likely a short sale or a principle reduction).
The bank is legally required to report the amount of debt that is forgiven or cancelled to the IRS.
The IRS labels this amount as “income.” Even though the homeowner is never given any cash from the bank, it must be considered income because it is a credit that is issued to the borrower from the bank that didn’t previously exist.
The homeowner is now responsible for paying income tax on this amount.
In 2007, the Mortgage Debt Relief Act was passed so the homeowner is no longer required to pay taxes on forgiven or cancelled mortgage debt. This Act was always intended to be a temporary solution. Barring an act of congress extending the act, it is now set to expire at the end of 2012. For distressed homeowners, this means that time is running out to take advantage of this program, which can save a borrower thousands of dollars.
Many people are struggling with their home payments. Often the best solution for homeowners in this situation is a short sale in which the bank agrees to accept less than is owed on the mortgage. The bank prefers not to foreclose, and short sales are more common than ever before.
Mortgage Debt Relief Act – Frequently Asked Questions:
When does the Mortgage Debt Relief Act Expire? December 31, 2012.
How much debt can be forgiven? $2 million ($1 million if married and filing separately)
Does this apply to any debt that is forgiven? No, the Mortgage Debt Relief Act applies only to debt forgiven on your primary residence.
Who determines how much debt is forgiven? The lender is required to report any forgiven debt that is over $600.
Will this be reported on my credit? If a foreclosure was started, then it probably will be, although it will be less impactful than if the foreclosure is completed.
Rudy L. Kusuma is a licensed real estate broker. He specializes in complex transactions representing property owners in disposition of their real estate, and has significant experience in pre-foreclosure sales, short sales, divorce sales, trust, and probate. You may contact him by telephone at 626-780-2221 or visit his website www.TeamNuVision.net
