With the Door Closing on Mortgage Debt Forgiveness, Should Strapped Homeowners Rush Sale Plans?

Aug. 9, 2012 - PRLog -- SAN LUIS OBISPO, CA – According to the IRS Publication 4681, The Mortgage Debt Relief Act is a federal tax law that allows qualified taxpayers to be exempt from taxes on debt forgiveness associated with a mortgage. Debt forgiveness occurs when a person does not have to pay back the full amount owed to a lender(s), rather a portion of the debt is repaid commonly through a short sale and the lender forgives the rest. The Mortgage Debt Relief Act is set to expire at the end of 2012 and many real estate professionals are advising strapped homeowners to begin transactions while they still have enough time to take advantage of the debt forgiveness.

“In my experience short sales can take as few as two months or as long as nine months. The sooner you start the process, the better. If the tax relief for debt forgiveness is not extended by Congress, a home seller who completes a short sale, may be liable for federal and state income taxes on the amount forgiven by the seller’s lender(s),” said Dawna Davies, owner and broker of the Davies Company.

The Mortgage Debt Relief Act applies only to forgiven debt used to buy, build or improve a homeowner’s primary residence. Vacation homes, investment properties, or other second homes do not qualify. Tax relief on debt forgiveness was enacted by congress in 2007 during the housing crisis and was later renewed in 2008 to 2012. Whether it will be renewed again has yet to be determined.

There is some opposition attached to renewing the legislation due to concerns over creating a permanent American tax system promoting high-risk mortgages. Many professionals, however, view The Mortgage Debt Relief Act as a crucial part of the housing market recovery. Without tax exemption, the options for mortgage relief are very limited for homeowners. In non-recourse states, like California and Nevada, the lender can only recover the collateral. Therefore, not extending the tax exemption could result in an increase in the number of foreclosure properties.

“I feel that the tax relief on debt forgiveness should continue. It will encourage struggling homeowners to consider a short sale and the benefits it can provide. These may include a less negative impact on credit scores than a foreclosure. Loan debt forgiveness, in any form, has serious tax and legal implications. All property owners are advised to seek legal and tax counsel before making decisions to accept or decline debt forgiveness, as in any real estate transaction,” said Davies.