Congress’s late night passage on New Year’s Eve of the American Taxpayer Relief Act of 2012 extends an important resource for distressed homeowners, the Mortgage Forgiveness Debt Relief Act of 2007, which was set to expire at midnight on December 31, 2012. According to the National Association of Realtors, the American Taxpayer Relief Act of 2012 passed the Senate with a vote of 89-9 and then passed the House of Representatives with a vote of 257-167. With the extension of this Act through the end of 2013, the recovery of the housing market will continue to be assisted by the forgiveness of taxation on cancelled debt.
Before the Mortgage Forgiveness Debt Relief Act of 2007, homeowners could be taxed on unpaid mortgage debt. For example, if you owed your lender $300,000, but received only $250,000 toward the debt, then that unpaid $50,000 was considered imputed money that the government taxed as ordinary income. Under the Mortgage Forgiveness Debt Relief Act of 2007 this unpaid debt would no longer be taxed, but the Act was scheduled to sunset on December 31, 2012.
Fortunately, during the debate on how to address the upcoming “fiscal cliff” the extension of the Mortgage Forgiveness Debt Relief Act was included in the American Taxpayer Relief Act of 2012 as Sec. 202. Without the extension of the 2007 Act, any forgiven debt would be taxable, whether it be from a short sale or foreclosure sale for sellers, or from a loan modification for owners, and would likely have caused a financial burden to underwater homeowners.
This great news means that if you are a distressed property owner we may be able to help you settle your debt without increasing your tax liability.
Be sure to keep up with our blog as we learn more and post updated articles about how the fiscal cliff, and the measures being used to prevent it, affects real estate. Call us at (206) 282-4848 to set up an appointment to consult with Lynn on your property, or visit our website at www.lynnarends.com.