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.
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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!
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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:
http://www.irs.gov/Individuals/The-Mortgage-Forgiveness-Debt-Relief-Act-and-Debt-Cancellation
John is the Vice President here at JohnHart, and as such is responsible for managing and directing the firm towards obtaining its ultimate goals.
He is also one of our main contributors on the Blog. (please see his profile page on the main site for more information.)
Thanks a lot for the information!!!
We would like to know if the forgiveness is only granted in California.
With kindest regards
Ragi Burhum
Ragi, the Debt Forgiveness Act applies nationally. Thanks for the feedback!
-John
I list many short sale homes and was happy to see the extension as well. I am hopeful that it doesn’t come on the back of the Mortgage Interest Deduction – a benefit for those who DO pay their mortgage.
Elizabeth, I completely agree! The mortgage interest deduction is a huge “pro” when it comes to the buy vs. rent argument! Reducing, or getting rid of it, would only help the government put a band-aid on their bullet wound of an expenditure problem! It would hurt everyone in the country, not just the rich or poor… Wouldn’t it be nice if for once the central government would take a look at themselves before jumping into legislation that could potentially be devastating for the market? I mean, if there are 500 people standing around in Brioni suits throwing matches near a gas can, maybe the problem isn’t that there is a gas can in the room, maybe the problem is that there is 500 men standing around throwing matches!!! – I think 450 would suffice 😉
Thanks for the feedback!
-John
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