Debt Relief Act Extended Through 2013
For the past few years, homeowners were able to utilize a tax break (part of the Mortgage Forgiveness Debt Relief Act) when dealing with a short sale. Fortunately for many, this debt relief has been extended until the end of 2013.
Under the United States Federal Tax Code, any debt that is forgiven is treated as debt discharge income . As such, short sales with a deficiency balance could be counted as income on the difference between the mortgage balance and the sale price.
EX: If a person has a $200,000 mortgage balance, and short sold their home for $150,000, the deficiency balance is $50,000. Under the original Tax Code, the $50,000 would be reported as income and taxed. This can cost the homeowner 2 ways:
1: In this example, tax on $50,000 of income can rack up to thousands of dollars.
2: An extra $50,000 of income could raise the homeowner to an entirely new tax bracket.
The Mortgage Forgiveness Debt Relief Act, however, forgives the difference between the debt owed and the sale price, up to 2 million dollars on a primary residence.
The Act-which passed in 2007- was scheduled to expire at the end of last year, but Congress did some last minute maneuvering to extend it out another year, due to the still struggling housing market.
- They are late on the mortgage payments
- They are not eligible for HARP, or any other refinancing
- They owe more on the home than it’s worth
- They can no longer afford the home , due to job loss or other circumstance
- They have tried unsuccessfully to sell the home at a price that would cover the mortgage balance
Homeowners choosing to short sale can sometimes face large drops in their credit score.
According to CNN/MONEY, shorts sales have tripled over the last 3 years. In some areas of the country, short sales make up almost half of the area home sales.
With this extension, homeowners who are underwater can breathe a little easier for a few more months, knowing this option is still in play.
~~Susan McCullah is the Product Development Director for Data Facts, a 23 year old Memphis-based company. Data Facts provides mortgage product and banking solutions to lenders nationwide. Check our our website for a complete explanation of our services