short sale tax

Short sale and foreclosure tax slated to return in 2014

The time has come. The Mortgage Debt Forgiveness Relief Act has finally run its course, and many homeowners will now be on the hook for short sale tax or foreclosure tax in 2014.

Let’s start with the back story. Originally passed in 2007, the Mortgage Debt Forgiveness Relief Act provided a tax exemption to homeowners when their mortgage company forgave debt though a short sale or foreclosure.

Let’s say you had purchased a home for $400,000 and took out a mortgage for $300,000. Later, you short sold the home for $200,000 and your lender agreed to forgive the balance of $100,000. Instead of the IRS considering that forgiven $100,000 as income, Congress allowed homeowners to short sell or foreclose without having to pay the IRS for their canceled debt.

In October 2008, due to the ongoing hardships suffered by the housing market, the act was extended through December 31, 2012. It was then extended once more by Congress through December 31, 2013. According to the LA Times, “as much as $2 million in forgiven debt for each household was exempted from federal taxes under the 2007 law.”

With 6.4 million homeowners still underwater on their mortgages, meaning they owe more on the loan than the property is worth, the government aid is still very much needed. However, despite bipartisan support, the law expired at midnight on Tuesday, December 31st and wasn’t extended because lawmakers were home for the holidays.

All hope is not lost however, as pending legislation in the House and Senate would extend the Mortgage Debt Forgiveness Relief Act through 2015, the LA Times reports. Such an extension could be passed retroactively, going into effect January 1st, as it was last year.

The extension of the act would not only alleviate tax burdens for homeowners, it would help keep the housing recovery alive. The legislation for extension is backed by the Mortgage Bankers Association and the National Association of Realtors, to name a few.

Seeing as the health of the housing market is indicative of that of the overall economy, lawmakers will hopefully do whatever they can to extend the act—ensuring the housing recovery is sustainable rather than a fleeting resurgence.


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