The Mortgage Debt Relief Act of 2007 is set to expire!!The most important tax-relief provisions enacted by Congress during the housing crisis to help financially strapped homeowners is about to come to an end. Although the 2007 law that allows taxpayers to exclude from income the amount of debt that is forgiven or canceled by their lenders doesn’t expire until Dec. 31, it will probably take your bank at least that long to either foreclose or allow you to short sale your house. So if you are someone that’s considering a short sale on your house you should know that time is running out.
While owners who are struggling to hold onto their homes shouldn’t throw in the towel solely because of the pending tax bite, it is certainly something to consider.
According to the law, borrowed money doesn’t need not be reported as income because you have an obligation to repay. But if your lender subsequently cancels what you owe, the IRS requires that you report that debt as income because the duty to repay it no longer exists. So, if you owe $350,000 and your lender forgives $50,000 of that debt in a $300,000 refinancing, that $50,000 is considered income. If your combined federal and state marginal tax rate is 36 percent, you would owe $18,000 in taxes. Ouch!!!
However, under the Mortgage Forgiveness Debt Relief Act of 2007, taxpayers are allowed to exclude from income the discharge of debt on their principal residence when they do a short sale— at least until 2013.
This means that when your lender agrees to a short sale, there is no tax on the difference between the selling price and the amount you owe. When your lender forecloses, there is no tax on the canceled debt. Even when you refinance at a lower loan balance, there is no tax on the difference between what you owed on the old loan and what you now owe on the new one.
Unless Congress extends the law, [and there is no indication lawmakers are even thinking about that] all residential mortgage debt relief that takes place on or after Jan. 1, 2013, will once again be considered taxable income.
So why should you worry about this now? Because the timeline for most lenders to approve a short sale in absolutely horrendous, especially if your lender is Bank of America.. I’ve worked certain B of A short sales that have taken up to 3 years to close.
There are other factors besides a tax break to consider when deciding whether to short sale your house. What will a foreclosure or short sale do to your credit score? How long will you be precluded from buying another house? Will the extra income push you into a higher tax bracket? How long will it take before the amount I owe is on par with what is owed? Is it worth being tied down to one property for many years or should I just short sale and be back in the market within 2 years and probably buy more house for way less.
The best thing to do is consult with a short sale expert and find out exactly where you stand. Contact us for a free consultation with my team of short sale experts. After closing thousands of Orlando short sales we are the leading authority for short sales in Orlando.
