The Mortgage Debt Relief Act of 2007 is set to expire at the end of 2012.
What’s that mean?
It means that if you are considering a short sale and/or foreclosure the time to act is yesterday. That’s because the amount a lender forgives on a primary residence will be taxable on federal income taxes the second the clock strikes midnight on Jan. 1, 2013.
Indeed, banks must sign off on a deal, as well as agree to release the distressed homeowner from the debt/shortfall before Dec. 31, 2011.
Currently, under the five-year plan, the Internal Revenue Service (IRS) “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.”
Sun-Sentinel breaks it down:
” … if a house sold $50,000 short of what is owed on the mortgage, then the selling homeowners will owe federal income taxes on that $50,000. Homeowners would owe $12,500 in they’re in the 25 percent bracket; $7,500 if in the 15 percent tax section. Homeowners would be on the hook even if the house sold but the bank had not formally forgiven the loan in a letter.”
With short sales taking perhaps several months to complete, if not longer, underwater homeowners — or those on the fence — should make their decisions sooner rather than later to avoid Uncle Sam hitting them hard on their taxes.
There’s no word at this time if the debt relief act will be extended again or modified to include “pending” short sales as the deadline approaches.