Mortgage Forgiveness Debt Relief Act Extension

Filed under: Market Comentary

mortgage reliefUnderwater homeowners were given good news this week as Congress included an extension of the ‘Mortgage Forgiveness Debt Relief Act.’ This Act was scheduled to expire on December 31, 2012, but was extended in the American Taxpayer Relief Act until December 31, 2013.

In simple terms, this means that if a homeowner sells his or her home for $75,000 when he or she owes $150,000, the homeowner will not be taxed the $75,000 that the bank has to write off, which is excellent news for struggling homeowners.

According to Ana Cuevas, this relief will definitely benefit homeowners who received mortgage debt forgiveness as a result of a reduction in principal, foreclosure, short sale, or deed in lieu of foreclosure. This extention is especially important to underwater homeowners who owe more for their home than it is worth. Homeowners already struggling with no equity in their homes would have faced significant difficulties paying income tax on their forgiven debt if the Act had not been extended.

The United States Federal Tax Code says that any debt that is forgiven, including mortgage debt, is treated as income and is subject to income tax. Many homeowners would have been faced with a tax of thousands of dollars. Now, since the Act has been extended, homeowners will not have to pay income tax on mortgage debt forgiven up to two million dollars.

In addition, homeowners who are able to avoid foreclosure by receiving a loan modification that includes a principal reduction will also benefit.

Something else to note is that the American Taxpayer Relief Act of 2012 also extends the exclusion of capital gains tax on principal residences. This means that single homeowners will be able to exclude up to $250,000 when they sell their home, and married couples will be able to receive a $500,000 exclusion.

The president of the California Association of Realtors, Don Faught, has credited realtors in the association for their role in being advocates for the Mortgage Forgiveness Debt Relief Act.  In response to this extension, C.A.R. sponsored Senate Bill 30 which extends the tax exemption on mortgage forgiveness to include California state income tax as well.  Once passed, SB 30 will be retroactive back to January 1, 2013.

Supporters of this Act are strongly advocating even extending the Act beyond 2013 in order to protect homeowners and help the current housing market, which has been seeing home values continue to rise recently.

If you need more information about the extension of the Mortgage Forgiveness Debt Relief Act, please contact me to set up an appointment!


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