Mortgage Tax Debt Relief Forgiveness Act

If you owe a debt (mortgage) to a lender and through a short sale or foreclosure there is a difference between what you owed on the mortgage and what the house ended up selling for in a short sale or foreclosure, the lender is required by the IRS to issue a tax form 1099 for the difference. This means that you may have to treat that difference as income and pay taxes on it.

The Mortgage Tax Debt Forgiveness Relief Act, which was originally passed in 2007, generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.  However while this important Act was extended, it was just for a year and is now set to expire on 1/1/2014.  It may get extended again, or it may not.

In the hundreds of short sales we have negotiated most do not end up having to pay on an issued 1099-C cancellation of debt. While we are not CPA’s and we always recommend that you use one, there are many exceptions to this rule including the Mortgage Debt Relief Act of 2007 as discussed here and the rule of insolvency as well as non-recourse. Of course there are some clients who do end up having a tax liability and this is important to ascertain before committing to a short sale so that you do not receive a large tax bill surprise.  Even if you do end up owing a tax liability to the IRS you have to weigh the cost of that bill with keeping the property depending on how much in the red you are each month and how upside in value the home is.  Please see this important IRS resource guide; in particular pages 4 and 5 of the PDF document. It is important to seek legal and tax advice.

Call today for a free attorney consultation to learn if a short sale is right for you.

Read below to find out more about the extension of the Mortgage Tax Debt Forgiveness Relief Act as it was voted on at the end of 2012.

2013 Extension of the Mortgage Tax Debt Forgiveness Relief Act

The end of 2012 was tense as we all waited to find out what would become of the Mortgage Tax Debt Forgiveness Relief Act of 2007 which was set to expire on January 1, 2013. Under the IRS code cancelled debt is usually considered income, but a provision of the Debt Relief Act allowed an exception to this rule for certain borrowers who qualified to exclude certain cancelled debt on a principal residence from their income. Debt reduced through mortgage restructuring, as well as mortgage debt associated with a foreclosure or short sale, qualifies for the relief provided under the Act.

There were several bills in the House and Senate that proposed to extend the bill anywhere from an additional year to an additional 3 years. At the time, with the “fiscal cliff” looming ahead, it was feared that any extension of this critical Act would be overlooked or perhaps dealt with a later point. This would have left the 50,000 homeowners a month who lose their homes to foreclosure, the 42,000 homeowners a month who short sell their homes and roughly millions more annually who may get a modification or settlement at risk for having to pay income taxes on the portion of their mortgage that is “shorted” through a foreclosure, short sale, principal reduction, settlement or any other loan workout.

On 1/1/2013 after the Senate voted on the Tax package and before the House reconvened to vote on it, a copy of the Senate version was posted online. We were happy to find that a one year extension of the Mortgage Debt Relief Act was included in the tax package as passed by the Senate. The House then passed the controversial bill in the same form as it was voted on and approved by the Senate.

This means that the Act has been extended for approximately one year and is now set to expire on January 1, 2014. As always since we are not tax professionals we recommend that you seek out a competent and qualified CPA to assist you with filing taxes for the year in which you will receive the 1099 from your lender(s) or to assist you with any tax related questions you may have. These forms are typically sent out by the lender the following January after the year in which the event occurred (although some lenders, like Green Tree, will send it out a few weeks after the close of escrow).

Please also remember that if for some reason you are advised that you don’t qualify under this Act, there are several other exceptions that the IRS has for not having to pay tax on the difference between what you owe and what is “netted” by the lender. This includes insolvency (when your debts exceed your assets including the mortgage debt at the time of the sale) and the debt being categorized by California law as “non-recourse”.

If you, or any family, friends or co-workers with property in California have been considering a short sale but may have been on the fence about it, now is the time to gather the pertinent and relevant facts as they apply to their individual situations in order to make an educated decision on what to do. As short sales do take some time to negotiate and close escrow they will want to get started soon in evaluating their options in order to make sure that if they do choose to do a short sale they can close escrow before the expiration of the Act on January 1, 2014.

We would be happy to speak with anyone to go over their situation and all of their options, as always the attorney consultation is complimentary. Please call 916-999-1376.

If you would like to read the bill as it was passed, you can find it by clicking here. The text that specifically applies is on page 25 and is also below;

SEC. 202. EXTENSION OF EXCLUSION FROM GROSS INCOME OF DISCHARGE OF QUALIFIED PRINCIPAL RESIDENCE INDEBTEDNESS.

(a) IN GENERAL.—Subparagraph (E) of section 108(a)(1) is amended by striking ‘‘January 1, 2013’’ and inserting ‘‘January 1, 2014’’.

(b) EFFECTIVE DATE.—The amendment made by this section shall apply to indebtedness discharged after December 31, 2012.

Experienced Sacramento Real Estate Attorneys

We are experienced Sacramento Short Sale Real Estate Attorneys and Sacramento Short Sale Realtors. We are a unique and powerful combination and can help you with your real estate legal issues and short sales.  We have helped thousands of people with pressing real estate issues find solutions and relief through the use of short sales, deed in lieu of foreclosures, strategic foreclosures, mortgage debt settlements and legal real estate review and advice.  

Our short sale real estate attorneys have achieved proven results and can give you the great legal advice and strategy needed to get you the results you want. Contact us today to schedule your complimentary attorney consultation by clicking HERE or by calling 916-999-1376. We look forward to helping you with all of your Sacramento short sale real estate needs.