UPDATE: After this article was written, on January 1st, 2013, Congress voted and the Mortgage Debt Forgiveness Act of 2007 was extended for another year.
Unless something happens between the time of the publication of this post and midnight tonight, the Mortgage Forgiveness Act of 2007 will expire tonight at midnight. Initiated by President Bush, this IRS Act was a tax break that saved struggling homeowners from paying thousands of dollars to the IRS.
As it stands right now, struggling homeowners in certain situations would not be responsible for paying taxes on any of the forgiven debt associated with a short sale, a foreclosure, or a deed-in-lieu of foreclosure. For example, if the short sale lender forgives $50,000 in debt, borrowers would otherwise be responsible for paying the income tax (on the $50k) at their current tax rate. Remember, however, that this Act does not apply to all short sales, foreclosures or deeds-in-lieu.
While the National Association and Realtors® and the California Association of Realtors® have both made pleas to get this act extended, nothing has occurred quite yet. In fact, rumor has it (idle gossip around the water cooler) that this extension may possibly pass after the new year and become retroactive.
No matter the water cooler talk, short sale sellers need to speak with an accountant about their unique financial situation. As pointed out by Les Christie at CNNMoney.com:
“Even if Congress allowed the mortgage debt forgiveness to expire, not all borrowers who lose their home to foreclosure, sell their home in a short sale or have their principal reduced will take a tax hit. If the debt is discharged in a bankruptcy, no tax is due. And anyone who is insolvent — meaning they have more debt than assets — at the time the debt was forgiven would not have to pay the tax. And in some states like California, certain borrowers are protected against paying the tax because of the way the state treats foreclosures.”
So, if your short sale seller goes into a panic because their short sale has not closed by end of business today, tell him (or her) to speak with a CPA. They may learn that the crisis has been averted.
On another note, we at Short Sale Expeditor® wish all of our friends and raving fans a most excellent new year. We look forward to being a part of it!