A Dec. 31, 2012 deadline looms for homeowners taking advantage of debt-forgiveness foreclosure alternatives, including the surging option of ?short sales? ?- when banks allow the sale of a property for less than the balance owed on its mortgages.
In three months, the George W. Bush tax cuts expire, but so does the Mortgage Forgiveness Debt Relief Act of 2007.
The law generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced from mortgage restructuring qualifies for this relief. So does mortgage debt forgiven through foreclosure.
Otherwise, struggling Americans who have already lost their homes could be saddled with additional taxes on the debt forgiven. Prior to the law, most mortgage debt forgiveness above a home?s fair market value was usually treated as taxable income.
Without an extension of the Debt Relief Act, short sales could slow down to a trickle. So could mortgage modifications that involve principal reduction or other forms of debt relief.
The timing couldn?t be worse. Fannie Mae and Freddie Mac, which own or guarantee 60 percent of U.S. mortgages, are about to initiate streamlined short sales beginning Nov. 1.
The new Fannie/Freddie program will help ?underwater? borrowers and others with certain hardships avoid foreclosure, according to the independent regulator over Fannie and Freddie, the Federal Housing Finance Agency (FHFA).
For example, borrowers will now qualify for a short sale if they need to relocate more than 50 miles from their home for a job transfer or new employment opportunity.
Mortgage Forgiveness Debt Relief Act of 2007 is in effect until Dec. 31, 2012. Up to $2 million of forgiven debt is eligible for this exclusion ? $1 million if married filing separately
?The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home?s value or the taxpayer?s financial condition,? the IRS states.
Nonetheless, homeowners who will have or have had mortgage principals reduced and remain in their homes, or those whose debt was erased above a short sale?s price, should consult a tax professional or research filing requirements with the IRS.
Source: http://ecreditdaily.com/2012/09/taxes-forgiven-debt-kill-surging-short-sales/
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