It was just announced that the Mortgage Debt Forgiveness Act will be extended through 2013!! For those who are unaware of what this is, here is a brief explanation:
The debt forgiveness act is the federal government act that basically says if you pursue and successfully complete the short sale of your home or property, you will not be taxed for the difference between what the property sold for in the short sale, and what you owed on the mortgage at the time of sale.
This crucial act has just been extended for the rest of this year to allow for homeowners in default to continue to pursue short sale as a solution without having to worry about the tax liability associated with doing so.
For the past few months real estate agents, short sale experts, accountants, attorneys, and homeowners (whether in default or not) have been wondering the same thing: Will this “Act” be extended? As of last night the Senate and the House of Representatives passed the 2013 American Tax Payer Relief Act, and within this bill (section 202 to be precise) the Mortgage Debt Relief Act is extended until 1/1/2014.
Why is this important? This act is arguably the single most important factor when it comes to a distressed homeowner deciding whether to short sale or not, because of the simple fact that the central government considers a “forgiveness of debt” to be the same as an alternative form of income. The federal government’s point of view, when it comes to debt, is illustrated in this example: If you borrowed $10 from a friend and two years later that friend told you that you only had to pay him back $5, wouldn’t you have netted a 50% profit off the transaction? Of course you did! The reason that distressed homeowners often facing foreclosure are getting a free pass on this tax is because of two reasons:
1. If we extend the “friend lending you $10″ example, a short seller doesn’t end up with the $5
the friend forgave him, because he doesn’t get to keep the house he is short selling.
2. A short sale is not as devastating as an REO sale, with respect to the affect of the sale on the value of surrounding properties.
Without the extension of this “tax forgiveness”, one would have to choose between owing the bank for a property that is not worth what they owe on it, or owing the IRS and federal government for the debt they were forgiven. While there would still be a major benefit to pursuing a short sale, if you are severely upside on your property (deep in negative equity), the psychological impact of knowing that even after going through the short sale process you would still end up owing someone money would prevent homeowners from seeing a short sale as a viable pre-foreclosure option.
We will continue to bring you details on the extension, so be sure to check back on this page frequently or follow us on twitter @jhhre for up to the minute real estate news!
Leave us your thoughts below on the extension, and also what you think this means for the overall housing market!
Read more about our thoughts on Obama’s second term and what it means for the housing market here:
More information about the extension can be found here: