Mortgage Forgiveness Debt Relief Act Extended

Prior to the act, the IRS looked at the forgiven debt as taxable income.

Congress extended the Mortgage Forgiveness Debt Relief Act of 2007. This Act was due to end December 31st of 2012 and now is extended through the end of 2013.

What does this mean for troubled homeowners who wish to complete a short sale in 2013? Let's look at this hypothetical example below:

A family owns their home and then due to difficult times, can no longer afford to
pay and stay in the home. They also can't sell the home at market value because
they purchased in 2008 for $700K, at the height of the market. By mid
2012, the home is now worth $550K. The family applies for a short sale with
their bank, so to avoid foreclosure. The bank clearly sees the hardship of this
family and agrees to allow them to sell the home as an approved short sale for
$150K less than the loan amount, thus avoiding foreclosure.  

Prior to the act, the IRS looked at the forgiven debt as taxable income. With the extension of this Act through 2013, this family will not owe taxes on the $150k difference that the bank took as a loss.

What will happen if the Act does not get extended again into 2014?

If Congress does not extend this Act, and the above scenario happens in 2014, then the IRS would see the $150k as taxable income.  In a 25 percent tax bracket, that is $37,500 the homeowner is responsible in paying the IRS.

This Act benefits qualified homeowners through 2013, who may have otherwise owed taxes on the bank forgiven debt after closing escrow on a short sale.

Please note I am not a tax advisor and that homeowners need to make sure to always consult their tax advisor.

This post is contributed by a community member. The views expressed in this blog are those of the author and do not necessarily reflect those of Patch Media Corporation. Everyone is welcome to submit a post to Patch. If you'd like to post a blog, go here to get started.

JustUs January 08, 2013 at 04:20 AM
No one forces anyone else to buy property in America. That is an individual CHOICE. When you buy you take a risk. The price of your property could go UP or could go DOWN. If you don't want that risk - simply don't buy. But don't come to ME after YOU'VE made a losing bet and demand that I bail you out. That is communism. And it is destroying the nation. I am very adaptable at my advanced age. I can easily turn into a leech too. And I am giving it some deep, deep consideration. There is more than one way to skin a cat. Whatever behavior they incentivize - I will gladly oblige. :)
MFriedrich January 08, 2013 at 05:58 PM
The biggest problem is this: Initially no effort was made to discriminate how this tax break would be administered, and this created a situation where HELOC abusers and Ponzis really were given free money. In the extension, nothing was changed. What they didn't do, and should have done, was extend the tax break only for resale amounts less than the original purchase prices of the property. If the debt exceeds the purchase prices of the property, then this money was not the original down payment, and the excess truly was “income” (HELOC!) to the borrower that should be taxed. For example, if a loanowner paid $500,000 and sells for $300,000, they should pay no tax (under the previous perk legislation). However, if a loanowner paid $300,000, then borrowed $1,000,000 (very common practice here by the OC Ponzis), and sells for $650,000, then they should have to pay tax on the $350,000 they were short on their mortgage. This flagrant HELOC abuse is rampant in Orange County California and other parts of teh state, and of course was ignored and not addressed by Congress in renewing the legislation. The NAR would never have been an advocate of this policy change that would have protected US taxpayers because it would slow down short sales, and as such would also reduce agent sales commission opportunities.
JustUs January 08, 2013 at 06:15 PM
The entire mortgage scam was a cover for big business by the government. Start to finish. The government actually pressured the banks to hand out subprimes to people who would normally not qualify for home loans. But the banks liked it because when you loan money (with the government's blessing) you are guaranteed to make nice profits). There was an investigative article in the OC Register a few years ago about the shennanigans Washington Mutual was involved in locally in this loan making ponzi scam. Look at all the robo signings. Clearly criminal in nature. Blatant acts of perjury that were overlooked. Financially irresponsible people took advantage of a system that was advocated by officials in our highest government and business offices. This was just another attempt to shoot more fiscal heroin into a dying economy that relies on BUBBLE ECONOMICS to stay afloat. Like the dot com era. Trying to pull demand FORWARD to save a dying economy laden with high health care costs and massive government deficits brought on by out-of-control and unbridled spending while sending American jobs overseas. It is a formula for disaster and it will eventually detonate our entire economy and probably result in WW3. A world war will be the FINAL attempt to stimulate the economy. And that too will spiral out of control and have devastating consequences.
MFriedrich January 08, 2013 at 06:20 PM
It's worth noting that Realtors loved Countrywide in the good ole days of the housing run up and pre-crash. So what has happened to the crooks who were never indicted? Plenty of time for golf and public speaking events to blame everybody else: http://www.huffingtonpost.com/2012/12/13/angelo-mozilo-no-regrets_n_2293901.html
JustUs January 08, 2013 at 06:32 PM
That's right. Mozilo walked. Just like Jon Corzine walked. And many hundreds (thousands?) more walked. In the 1990's Savings and Loan scandal the special prosecutor got jail sentences on nearly 1000 offenders. And the 2008 meltdown was about 1000 times larger than the Savings and Loan scandal. We have become a lawless nation for the elite. This is promoted by our government. Instead of punishing the Too Big To Fails - they rewarded them by making them even bigger. Go read Matt Taibbi's recent article on what really happened around the time TARP got passed. Go read about how it really went down with Paulson. You would NEVER read this stuff in the LA Times or the OC Register or in any mainstream news publication. Why? Because we really don't have any legitimate investigative reporters left in America. That's why. They are all told what to write and what to leave out. Sad, but true. We are a dying empire. The the laws only apply to little people - it is a reflection of a banana republic - not a constitutional republic. Our best days are behind us. And that's as obvious as the nose on my face.


More »
Got a question? Something on your mind? Talk to your community, directly.
Note Article
Just a short thought to get the word out quickly about anything in your neighborhood.
Share something with your neighbors.What's on your mind?What's on your mind?Make an announcement, speak your mind, or sell somethingPost something
See more »