At the height of the housing crisis, when the sale of distressed properties (short sales and foreclosures) across the United States began to increase, Congress passed the Mortgage Forgiveness Debt Relief Act of 2007, designed to provide at least some consolation to people who had lost their homes.
The law states that only debt forgiven in calendar years 2007 through 2013 is eligible. Up to $2 million of forgiven debt qualifies for this exclusion ($1 million if married filing separately). To get the relief, debt must have been used to buy, build, or substantially improve a principal residence and be secured by that residence.
So, if you’re clinging to your house but it’s looking as though you won’t be able to hang on, the best time to get out from under the mortgage is before the debt relief law ends. This is particularly true if you are considering a “short sale”. That’s when the lender allows the borrower to sell the house for less than what is owed. Often, the borrower can negotiate to have the remaining balance on the mortgage forgiven.
This tax rule has become particularly important as more homes are sold through short sales. In the Outer Banks, “short sales” accounted for 14% of all residential sales thru Q3 of 2011 and REO (bank owned) properties accounted for 24% of all residential sales thru Q3 of 2011.
Here are the facts about Mortgage Forgiveness Debt Relief Act :
Up until December 31, 2013, taxpayers that qualify under the guidelines of the Mortgage Forgiveness Debt Relief Act and Debt Cancellation can discharge the amount of forgiven debt as taxable income. You can view the qualification through the IRS website.
Summarizing the site: If you complete a short sale or your property is foreclosed on, you may not have to claim the difference in the amount of settlement as taxable income.
However, if you complete either of the above AFTER the Mortgage Forgiveness Debt Relief Act expires in 2013, you WILL be held responsible for the difference as taxable income.
Here is an example:
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Short Sale or Foreclosure Before December 31, 2013 |
Short Sale or Foreclosure After December 31, 2013 |
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If you owe $300,000 and the property sells for $200,000 $100,000 difference in reported income is NOT taxable in most cases $100,000 @ 0% = $0 in additional taxes owed to the IRS* |
If you owe $300,000 and the property sells for $200,000 $100,000 difference in reported income IS taxable in most cases $100,000 @ 28% tax bracket = $28,000 in additional taxes owed to the IRS* |
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*Not all properties qualify. View the IRS Mortgage Forgiveness Debt Relief Act to see if your home qualifies.
Team Realty at Continental Properties, Inc.
(561)459-4361 / Teaminfo@Teamrealtydelivers.com Search Team Realty Homes For Sale If you’re considering Buying, Selling, Relocating, or Investing in Palm Beach County and need a Professional Realtor, it would be our pleasure to help you! Be sure to visit Team Realty for total access to all available homes in the Palm Beach County area. |
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