TAX RELIEF FOR SHORT SALES EXPIRES IN 356 DAYS

The clock is ticking until the expiration of the 2007 Mortgage Debt Forgiveness Act expires on the last day of December this year. Previously set to expire earlier, Congress extended the expiration date to end in effective January 1, 2013. Will it be extended again? Is it necessary?

The extension should be extended again – but that is up to Congress. The effect of the Act is to allow the income that is created when a mortgage is reduced in principal to be exempted from ordinary income. That saves significant amounts of money for the borrower.

As an example, if a mortgage obligation is reduced because of any number of examples exist – such as (1) a deed in lieu of foreclosure where the difference between the value of the home and the larger amount of the mortgage is forgiven; or (2) the house is sold in a short sale, where the lender agrees to accept an amount less than the amount that is owed to it by the borrower, forgiving that difference; or (3) a mortgage that is greater than the value of the home is reduced in the amount of principal (that's an elusive event!), with that amount being “forgiven”. In each of these examples the “forgiven” amount of the debt is ordinary income, just like salary or wages, and you normally have to include that in your tax return and pay income tax upon all of your income. Under the rules of the 2007 Mortgage Debt Forgiveness Act, by filing a form with your tax return the “forgiven” income included in your gross income then got removed from gross income, resulting in no tax on the “forgiven” income. The income or the report of the income is commonly called the 1099C income. The “C” stands for cancelled debt.

So let's make it simple. If the short seller (or DIL seller) is in the 25% tax bracket and has $100,000 of debt forgiven by the lender, the seller has to pay income tax of $25,000. With the Act still in effect, that tax is zero.

A detailed explanation of the Act - including who is eligible - is provided in my previous articles on ActiveRain: MORTGAGE RELIEF ACT - CHRISTMAS PRESENT TO PRIMARY HOMEOWNERS; Mortgage Forgiveness Debt Relief Act of 2007- Another Look; FORM RELEASED BY IRS FOR DEBT RELIEF ACT FILING; SHORT SELLER STILL MUST DECLARE INCOME ON SALE!

The Act should be extended because from the discussions associated with the reasons for the creation of the Act in the first place, no one understood (or admitted they knew) the duration of the foreclosure issue, nor the extent of the recession and financial distress of the population. Adding huge tax liability to already distressed homeowners would only encourage more bankruptcy filings (a bankruptcy can eliminate the forgiven debt aspect of a short sale or other disposition of a loan where there is otherwise forgiveness and thus income, because by judicially eliminating the personal obligation on the promissory note, there can be no forgiveness by the creditor, but timing is important).

On the other hand, many parts of the county are not as critically hit as Nevada, California and Florida and extending the Act’s expiration may not be as critical to those other states. This is a “wait and see” until it happens.

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Copyright 2012 Richard P. Zaretsky, Esq.

Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make. This article is for information purposes and is not specific advice to any one reader. Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660 RPZ99@Florida-Counsel.com - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide! Shortsales@Florida-Counsel.com Website www.Florida-Counsel.com.

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