One part of the fiscal cliff that was extended will provide at least one more year of a key housing and tax benefit for homeowners that are underwater in the mortgages.
On January 3rd, 2013, President Obama signed The American Taxpayer Relief Act which extends the deadline of the Mortgage Debt Relief Act to December 31st, 2013. If the Mortgage Debt Relief Act had expired, any amount of cancelled debt would be considered taxable income for IRS purposes. The Mortgage Debt Relief Act was set to expire on December 31st, 2012.
With the new extension, homeowners now have less than 12 months to take advantage of this tax relief. And while that may seem like a long time, keep in mind that short sales can take up to 6 months (or more) to complete. A loan modification or a deed-in-lieu of foreclosure can take at least 3 months to go through. And a foreclosure can take up to a year to finalize.
For more information, see IRS News Release IR-2008-17 or IRS Publication 4681, Cancelled Debts, Foreclosures, Repossessions, and Abandonments.
If you are a homeowner, it is important to be aware of what’s happening with the real estate market and foreclosure crisis. Too many homeowners don’t fully understand all their options when facing an underwater mortgage or foreclosure. It is critical for you to do the research and determine the consequences of any financial decisions you are about to make. When the time comes to act, you want to be prepared for every possible scenario.
The current housing market has a reported negative equity gap of approximately $3.7 trillion. This number reflects the millions of homeowners who are underwater on their mortgages and owe more than their home is worth.
Charles Engel, the vice president of RealtyTrac, recently said, “Even if [these] homeowners aren’t struggling to make mortgage payments and therefore are at low risk for foreclosure, if they need to sell sometime in the next five years it’s likely they’ll need to sell via short sale.”
If you owe a debt (such as a mortgage loan and the lender cancels or forgives part of that debt, the discharged amount (which you no longer owe) may still be taxable according to the IRS. Under the Internal Revenue Code, all types of forgiven debt are still treated as income and subject to taxes.
Fortunately, there is tax relief for struggling homeowners. The Mortgage Debt Relief Act of 2007 was introduced to allow taxpayers to exclude income (on their tax returns) from the discharged debt on their principal residence. This can include debt that is reduced by mortgage restructuring as well as debt that is forgiven relating to a foreclosure.