Active Rain and the real estate blogs are alive with the news that In the wee hours of the night in Washington, the House of Representatives voted to approve HR 8 and roll us back from the edge of the fiscal cliff.
Included in HR 8 an extension of the Mortgage Forgiveness Act, which had helped protect homeowners who need to sell via a short sale from being hammered for phantom taxable income.
Of course, this didn't really matter here in Arizona - we're a non-recourse state, and the IRS says in such situations debt cancellation isn't taxable.
Having said that, it’s always nicer to have the extension and know the rules than reading between the legal lines and hoping like heck there really is no taxable event. And here are the rules …
- The home must be your principal residence (no investment properties qualify)
- The debt must be discharged between Jan 1, 2007 and Dec 31, 2012
- Amount forgiven must be under $2,000,000 or $1,000,000 if married filing separate.
What loans qualify for this protection?
- Debt must be secured by the home
- Debt must have been used to purchase the home or build the home
- Debt used to substantially improve the home is allowable
- Refinanced debt could also qualify but only up to the balance of the original mortgage prior to the refinancing. (for further clarification on this see IRS publication 4681
In other words, a HELOC or second mortgage used to purchase or substantially improve the home qualifies. That vacation in Tahiti? Not so much.
As always, if you have questions about what you may be able to do with your house and/or about getting started on a short sale, call or e-mail me and I can help.