Thoughts on the End of the Mortgage Debt Forgiveness Act
December 31, 2012 is the last day of The Mortgage Debt Forgiveness Act. This act has kept home owners who receive a 1099 for mortgage debt forgiven from having to pay income tax on it. In some cases, that mortgage debt forgiven may be as high as $100,000, or even higher.
Reading different real estate agent's across the country writing about this topic, I think there is a misunderstanding that ONLY mortgage debt forgiven in a Short Sale falls into this income tax relief. I gather that from the fear that many have in our industry that sellers will now just start walking away from their homes and letting them fall into foreclosure.
The Mortgage Debt Relief Act applied to debt forgiven in a Short Sale or a Foreclosure. Yes, that's right. Banks can issue a 1099 on unpaid mortgage debt if your home falls into Foreclosure. It's on the difference between what they get when THEY sell it and what YOU owed. Usually, the only reason they wouldn't is if the bank felt they had a way to collect the unpaid mortgage balance. In other states, there may not be recourse for lenders to collect, but in Virginia, that is in full force and the bank has five years to pursue that unpaid debt. So in Virginia, you'd probably prefer to see a 1099 if you were in a Short Sale or Foreclosure.
Because this act has covered BOTH Short Sales and Foreclosures, I do not see why on earth there would be a higher incidence of people "walking away" from their homes when it expires.
My thought is that this act will NOT be renewed for two reasons. First off, home owners who are conducting a Short Sale of their home are generally in financial distress. When you send these folks for tax advice, they generally find out that even if the Mortgage Debt Forgiveness Act doesn't cover them (maybe they were investors,) there is likely an insolvency issue that the tax professional can work with to cancel out the tax on the forgiven mortgage debt. Of course, you have to consult a tax professional for specific tax advice, and SHOULD ALWAYS before considering a Short Sale or walking away and letting your home fall into Foreclosure.
Secondly, I think the end of this act will discourage those that use Short Sale or Foreclosure as a strategic default method. These are folks that can afford to stay in their homes, but are trying to get out of the asset because it is worth less than what they paid and what they owe. Strategic defaulters are folks that would have a hard time proving a financial hardship and be more likely to incur massive tax debt as s result of a forgiven unpaid mortgage balance.
If you are a Northern Virginia home owner, in true financial distress and need to Short Sale your home, give me a call and I'll put you in touch with the tax professionals you need to speak with to see what your tax liability would be as a result of Short Sale. But remember, you are likely to face that same liability if your homes goes to Foreclosure.
Comments(7)