UPDATE! Mortgage Debt Protection Act and short sales in Coeur d'Alene

Coeur d'Alene Idaho Short Sale Realtor -

Last year, more than 250,000 Americans were able to negotiate short sales to avoid foreclosure.  The Mortgage Debt Forgiveness Act of 2007 made their deficiency (the difference between what they owed the bank and the amount the bank settled for) forgiven, meaning they did not have to treat the deficiency as if it were taxable income.  On average, $37,000 was the amount of forgiven debt in short sales.  Coeur d'Alene short sale taxpayers in a 25% tax bracket would have owed the IRS an extra $9,250 in taxes. 

The Mortgage Debt Forgiveness Act of 2007 expired on December 31, 2013. 

This could limit the options of 6.4 million Americans, and thousands in Coeur d'Alene who are still underwater.  Ironically, now banks will get to write off the debt relief they are providing to homeowners, but those who receive the help to avoid foreclosure will have to treat it as taxable income.  Unless Congress agrees to extend the tax break as they have done before.  I'm not optimistic about that happening since lawmakers are in the mood to overhaul the tax code and eliminate as many deductions as possible.

Fortunately, the IRS has always provided
another exception to tax liability on forgiven debt. 

Most people, even in the field of real estate who are working short sales, aren't aware of this relief.  In short, if your liabilities are greater than your assets immediately proceeding the short sale, the forgiven deficiency will not be taxable.  Most of my Coeur d'Alene short sale clients who are in the process of short selling their homes will qualify to have their deficiency forgiven under this long standing IRS exception. 

Any Coeur d'Alene homeowner in a short sale situation is welcome to give me a call.  I can answer your questions and direct you to the IRS information and their worksheet so you can determine if you are eligible for deficiency debt forgiveness.  No matter the fate of an extension of the Mortgage Debt Forgiveness Act of 2007.

Read the New York Time article here.