Congress RENEWS Critical Homeowner Relief Program

By
Real Estate Agent with RE/MAX Professionals 253.225.8322

Sandy Wagner

As part of tax bill H.R. 8, which addressed the so

called “fiscal cliff,” On January 1, 2013, Congress

passed an extension of the Mortgage Forgiveness

Debt Relief Act of 2007.

For distressed homeowners, the extension of this

act comes as welcome news, as it means foreclosure

alternatives, such as loan modifications and short

sales, will continue to be valuable options free of

tax penalties on forgiven debt. This report details

how the extension of the Mortgage Forgiveness Debt

Relief Act will save these homeowners thousands in

taxes, and what to do if you or someone you know

find yourself facing the possibility of foreclosure.

What Is The Mortgage Forgiveness

Debt Relief Act?

The Mortgage Forgiveness Debt Relief Act was

originally passed in 2007 to aid the millions of

homeowners who suddenly found themselves in

danger of losing their homes to foreclosure following

the housing market crash.

Under the Mortgage Forgiveness Debt Relief Act, any

debt forgiven in a short sale, foreclosure, or loan

modification is exempt from federal taxes.

Here’s how the process worked before the Mortgage

Forgiveness Debt Relief Act:

• A homeowner found that he or she could no longer

afford his or her mortgage. At risk of default and

foreclosure, the homeowner was able to negotiate

with the bank an option that avoided foreclosure

(most likely a short sale or a principle reduction).

• The bank was legally required to report the amount

of debt forgiven or cancelled to the IRS.

• The IRS labeled this amount as “income.” Even

though the homeowner was never given any cash

from the bank, it was considered income because it

was a credit issued to the borrower from the bank

that didn’t previously exist.

• The homeowner was now responsible for paying

income tax on this amount, which could amount to

tens of thousands of dollars.

With the recent extension of the Mortgage

Forgiveness Debt Relief Act, eligible homeowners

will continue to remain exempt from these taxes,

saving them from paying thousands, or even tens of

thousands, in taxes on top of losing their homes.

When does the Mortgage Debt Relief Act Expire?

December 31, 2013.

How much debt can be forgiven?

$2 million ($1 million if you are married and

filing separately.

Does this apply to any debt that is forgiven?

No, the Mortgage Debt Relief Act applies only

to debt forgiven on your primary residence.

Who determines how much debt is forgiven?

The lender is required to report any forgiven

debt that is over $600.

Will be reported on my credit?

If a foreclosure was started, then it probably

will be, although it will be less impactful than

if the foreclosure is completed.

Sandy Wagner

Sandy Wagner

Short Sale Specialist - Helping people find a way out of foreclosure

253.225.8322

www.sandywagnerhomes.com


Comments (1)

Steven Cook
No Longer Processing Mortgages. - Tacoma, WA

Sandy -- touching on point near the end of your blog, want to make sure people realize that either a foreclosure or a short sale (of FHA or VA mortgage) will result in the same time frame until eligible to buy through those programs again.   The time frame is better for short sales than foreclosure on conventional loans, unless is FNMA mortgage.  The one advantage of short sale is that you have date certain for the time to begin, where one may have long time to wait until the foreclosure finalizes, which is when that clock starts.

Mar 07, 2013 04:34 AM