WHAT IS THE FUTURE OF THE MORTGAGE FORGIVENESS DEBT RELIEF ACT?
Do you remember the Mortgage Forgiveness Debt Relief Act? It was introduced by President Bush in December 2007. The Act offered relief to homeowners who would formerly owe taxes on forgiven mortgage debt. Before the Act introduction, underwater homeowners who sold their homes on short sales had to pay income tax on the amount of debt forgiven by lenders. The Act helped to popularize short sales among borrowers who needed to sell their underwater properties. Some claim that the law helped to prolong the home crisis as it caused many "planned defaults". As short sales for all practical reasons are given only to those borrowers who missed at least two mortgage payments. However, it often allows strategic defaults helping well to do homeowners to unload underwater properties on expense of those in real distress, as sellers pursuing strategic defaults are often in a better position to get through the complex and lengthy short sale process. Many believe that for house market to bottom out sooner and to start rebounding it is necessary to stop all outside intervention to home pricing including loan modifications or short sales.
Whatever your belief is, the Tax Forgiveness is set to expire at the end of 2012 and in light of dysfunctional Congress it is very unlikely that it will be extended again (it was already once extended in 2010). At least it seemed like this a few weeks ago. On February 15th, however, dsnews.com published the following information: In the Treasury’s Green Book, its summary explanation of the administration’s (2013) budget proposal, it calls for an extension of the tax break due to “the continued importance of facilitating home mortgage modifications.” The administration is proposing an extension that would apply to any amounts forgiven before January 1, 2015. So there is hope....
What should you do then if your property is underwater and you might have to sell it soon? You definitely need to do your homework and meet with your accountant to find out the tax implication of such sale now and after the end of the year assuming both cases, that the Relief Act will expire and that it will be extended. Also take in to consideration that while short sales are a bit easier than before, with more than one loan against the property, they still can take 3 to 6 months. Of course, to qualify for short sale you need to demonstrate that you are undergoing hardship to qualify. To be underwater is not a sufficient reason. And if short sale is not an option for you, what other options are out there? You might want to ride it through, but if it is not the option, talk to a professional. A bankruptcy or real-estate attorney might be able to help you through. Once you know what your options are - then you need to decide if to try to sell now or two wait.