For distressed homeowners who stressed and crammed to short sale their homes prior to Dec. 31, 2012, hoping to catch a major tax break on the difference owed to their lenders, y’all can take a collective sigh of relief.
That’s because the teacher, which in this case is the United States government, has given you one more full year — at a minimum — to get your financial affairs in order.
While most of us were doing our best to enjoy the 2012 holiday season, lawmakers on Capitol Hill were scurrying to ensure that the United States did not fly off the “fiscal cliff,” a complicated morass of tax cuts, tax hikes and tax breaks, which would have essentially curbed any and all progress made to restore the struggling national economy.
At the eleventh-hour (Jan. 1, 2013), Congress passed the “fiscal cliff bill” — “American Taxpayer Relief Act of 2012″ (see .pdf here) — to avoid the potential disaster. The bill has many nuances, however, a key provision is the extension of the aforementioned Mortgage Debt Relief Act of 2007 through 2013.
Cash-strapped homeowners who are considering a short sale and/or loan modification will now remain eligible for tax relief, meaning that they will not be required to pay taxes on forgiven debt if they are involved in a short sale, foreclosure and/or loan modification prior to Dec. 31, 2013.
Inman News breaks it all down:
“Had Congress not acted, the tax code would have reverted to its pre-2007 treatment of mortgage principal reductions or cancellations by lenders, whether through loan modifications, short sales, deeds-in-lieu or foreclosures: All principal balances written off would be treated as ordinary income to the homeowners who received them. For illustration, if a lender wrote off $100,000 of debt to facilitate a short sale, the seller would be taxed on that $100,000 at regular marginal rates, just as if he or she had earned it as salary. A return to taxation of principal reductions would have disrupted short sales — a growing segment of the home real estate market — in 2013, and almost certainly would have encouraged more distressed owners to opt for foreclosure and bankruptcy.”
The message is simple: If you want to avoid “scary tax bills” in 2014 as a result of your current (or even potential) distressed housing situation, do everything you can to avoid it right now. Research online, contact your lender(s), reach out to a local real estate professional and understand your options … and consequences. You’ve been given a second chance — don’t squander it.
Other key housing-related matters that were included in the bill covered deduction of mortgage insurance premiums, tax credits for energy-efficiency home improvements and tax credits for new energy-efficient new houses.
For more on the Mortgage Debt Relief Act of 2007 be sure to hit up our complete archive right here.