by Marty Macisso
As we end the year we get closer and closer to the expiration of the Mortgage Debt Relief Act of 2007. Insiders are hinting that an extension to the law set to expire the end of 2013 is in the works via a bill in Congress to extend the exemption of charged off mortgage debt as taxable income.
The Mortgage Forgiveness Debt Relief Act was enacted by Congress on September 25, 2007, and put into law by George W. Bush. This act is a safeguard against homeowners who had debt discharged or charged off after a foreclosure or short sale for their primary residences.
When a bank cancels a debt, a practice commonly known as "charge-off" the IRS treats this as income because of the obvious benefit to the debtor of no longer owing the money. However, when a homeowner goes through a foreclosure or short sale, often times the bank will charge off the remaining balance left over, known as the deficiency balance, which can be in the hundreds of thousands of dollars. For example, a seller will short sale their property in the State of Maine for $200,000 but the existing mortgage balance was $300,000 they are having a $100,000 deficiency balance settled, waived or canceled. The seller's mortgage company will no longer come after them for this debt, which is a great thing, however they will issue them a 1099-C and report it to the IRS. This has long been considered taxable income. Imagine that, going through foreclosure and getting a huge tax bill after loosing your house. Talk about insult to injury!
Thanks to the passage of the aforementioned Mortgage Debt Relief Act in 2007, the same sellers can now file Form 982 when filing their tax returns and have this canceled mortgage debt excluded from their taxable income if the sale was a primary residence. Tax treatment of canceled debt is rarely a point of concern for unknowing homeowners who merely are afraid of getting foreclosed and or just wanting to move on from their underwater homes.
The benefits of a short sale are both tangible in the form of getting cash for relocation assistance, having their deficiency balances waived and rebuilding their credit and stopping foreclosure. However, the Mortgage Debt Relief forgiveness act is a huge windfall for homeowners in Maine and across the country who have had a foreclosure or a successful short sale completed which resulted in having a bank waive the remaining debt.
As the clock to the New Year continues to tick, the Mortgage Debt Relief Act extension is still unknown and many experts expect an 11th hour bill to be introduced and passed by Congress. However, all of us in the short sale business are crossing our fingers as several government shutdowns and constant fighting by an inept Congress makes us nervous for any sensible resolution. Insiders are expecting this resolution or bill to pass because it is a bipartisan issue. Republicans will view this as necessary tax relief for the middle class while Democrats will view the Mortgage Debt Relief Act of 2007 as a social benefit to a segment of Americans still suffering through the worst housing crisis since the Great Depression.
No matter where you stand on the isle, you cannot agree with taxing Americans who have simply lost everything financially. We need major tax reform in this country and this Act should be made permanent law, instead of a series of annual extensions. Unfortunately, our new style of government seems to be just that, a government on the brink of shutdown every quarter. Americans should demand better from our Congress.