President Obama signed The American Taxpayer Relief Act of 2012 (Sec. 202) into law today which extends the Mortgage Forgiveness Debt Relief Act through December 31, 2013. This legislation extends dozens of other tax cuts that have expired or are set to expire at the end of the year, including one that extends homeowners’ ability to deduct the cost of mortgage insurance on a qualified personal residence.
Under the federal tax code, all types of forgiven debt are treated as income, subject to regular taxes. Because of the Mortgage Forgiveness Debt Relief Act, homeowners who get their mortgage debt forgiven through either a short sale or loan modification won’t be taxed on the amount forgiven up to $2 million. For an explanation on how this debt is forgiven by banks through short sales, see our blog, McGeough Lamacchia Negotiates Over $100 Million in Total Mortgage Debt Forgiveness.
This law was set to expire December 31, 2012. If it hadn’t been extended, any forgiven amount of debt would be considered taxable income, which would be devastating for homeowners who are already experiencing financial hardship.Do You Qualify?
Mortgage Forgiveness Debt Relief Act More Important Than Ever
This law is more important than ever because so many homeowners will be affected. The law impacts homeowners who are granted principal forgiveness on their loan, due to a short sale, a deed-in-lieu of foreclosure, or have lost their home to foreclosure..
Short sales are becoming more popular since they typically have a smaller impact on a borrower’s credit and they allow a borrower to buy a home again sooner than if they were foreclosed on. A homeowner who does a short sale will not have the money to pay taxes on the forgiven debt, making the extension of this Act crucial for homeowners seeking a short sale as a way to avoid foreclosure.
The extension will even affect homeowners who aren’t struggling to pay their mortgage. The average loan to value ratios— the amount of mortgage debt in relation to the home’s market value–have gone up across the country, to around 94.3%. If these homeowner need to sell their homes most likely they will need to do a short sale.
For More Detailed information on this go to Tax Implications of a Short Sale.
Do You Qualify?