Mortgage Forgiveness Debt Relief Act Extended For Another Year
The law – which was set to expire at the end of 2012 - is crucial to foreclosure mitigation efforts such as principal forgiveness of short sales. While there is still very little focus on the importance of this law, the fiscal cliff deal did extend its provisions for one more year. Normally, U.S. law decrees that when a lender forgives all or a portion of a borrower’s debt, the forgiven amount is considered taxable income for the borrower. This is known as Cancellation of Debt (COD) Income and must be included in a taxpayer’s gross income. This Act, however, created an exception to this rule under the U.S. Tax Code. The Mortgage Forgiveness Debt Relief Act allows homeowners who received principal reductions or other forms of debt forgiveness to not pay taxes on the amount forgiven. The amount extends up to $2 million of debt forgiven on the homeowner’s principal residence. For homeowner’s to qualify, their debt must have been used to “buy, build, or substantially improve” their principal residence and be secured by that residence. The law, which was passed in 2007 with a 5 year sunset provision, will now be in effect until January 1, 2014.
Those who think a short sale could be a possibility for them in the next couple years may want to way their options about completing it this year. There are no guarantees that we will get any further extensions of this act.
Feel free to contact me with questions regarding this program.
Brian Webb is a proud Homes for Heroes affiliate for St. Croix Valley. He represents clients in Hudson, River Falls, Stillwater, Woodbury, Oakdale, Cottage Grove, and surrounding Twin Cities Areas! He assists with buying, selling, investing, and property management of your home! He offers free advice and consulting services, contact him at HudsonRiverFallsHomes.com
mainstreet
3:18 pm on Thursday, January 3, 2013
The key here is getting the bank to forgive the debt. They won't in most cases as long as you make payments. Doesn't matter how far underwater you are.
Brian Webb
3:47 pm on Thursday, January 3, 2013
Yes, this is correct. In order to proceed with the short sale, the owner must stop making payments to the bank. Although it may not seem like it at first, this is a good thing for the owner. If you know you are going through with the short sale, you will not cause any further harm than you will already take with the short sale by not making payments to the bank. In the mean time, the owner can save all the housing payments up to the sale. The owner could use this to payoff other debts, use it towards securing future housing, or whatever will help you to move on with your plans. Right now, the rules are supporting the home owner to be able to complete the sale, rather than the homeowner falling into further problems or the bank taking further risks by forcing foreclosure. Banks have been even allowing payouts to the homeowner to allow for moving costs.
mainstreet
8:56 pm on Thursday, January 3, 2013
You had me and then lost me. You said "Right now, the rules are supporting the home owner to be able to complete the sale, rather than the homeowner falling into further problems or the bank taking further risks by forcing foreclosure." If the home owner simply stops making payments only to sell the house, he is not "falling into further problems", he is stealing from the bank and not living up to his responsibilities. How can you ethically promote such behavior?
Brian Webb
12:10 pm on Friday, January 4, 2013
I am not supporting the home owner taking advantage of the bank when they are capable of making the payments and are in good financial position. I would be referring to a situation where the home owner is having problems or need to move but cannot afford to sell. Under these situations, if you go to your bank and say that you need to sell, the bank will tell you that you need to miss a couple payments in order for you to proceed with a short sale. It may seem strange, but the bank will tell you the same thing. They would rather you sell the house under good terms as opposed to falling into distress or having a homeowner abandon the property. Some are so far underwater that they are years from any relief, and these are the owners that are considering other options. If you are mildly underwater, you will most likely be relieved within the next couple years as prices are beginning to come back. There are multiple options a homeowner can consider when in a tough spot, and I have dealt with them all. I am always willing to discuss all options with the homeowner.