In 2007 Congress enacted the Mortgage Forgiveness Debt Relief Act with the specific intent of helping homeowners who were underwater on their mortgages. This legislation protected homeowners from incurring taxes on debt forgiven during a short sale.
In its latest iteration it was renewed in December of 2015 as H.R. 1002. That’s good news for homeowners, not only for those who had short sales in 2015 but those who may have one in 2016 as well.
Prior to the legislation, any debt forgiven in a short sale was considered income and taxable as such. That meant that for overburdened homeowners who were already taking a loss on their property, they could also be hit with a major tax bill.
Fortunately, the extension of the Mortgage Forgiveness Act means that homeowners can breathe a little easier without the added “insult to injury” effect of paying taxes on phantom income.
How It Works
The legislation applies to homeowners who have used the home as their principal place of residence for at least two of the previous five years.
In addition, the debt to be forgiven must have been used to buy, build or substantially improve the home.
It allows for debt forgiveness up to $2 million which can be a tremendous relief whether you’re underwater on your mortgage or have experienced job loss or serious financial hardship as a result of the recent economic downturn and housing crisis.
Why It Matters
Homeowners who may have been concerned about considering a short sale in the past can feel more confident in their decision to move forward without the added burden of the tax implications.
If you’ve been victim to a downsized economy and you end up with a large write off, it can be difficult to impossible to afford the taxes incurred on that. We’ve seen homeowners file bankruptcy to avoid paying the overwhelming taxes associated with a short sale, which can have much farther reaching consequences for your credit score and ability to manage your finances.
But with the extension of this legislation you don’t need to take drastic and potentially further damaging measures to protect yourself.
You can also rest easier if you have a second mortgage that’s held by either Fannie Mae or Freddie Mac. Prior to the legislation, you were obligated to negotiate the short sale price with both your primary and secondary mortgage holder, which meant more red tape and a process that could last upwards of 12-18 months. When your goal is debt relief, that can be a tremendous burden.
Now, however, if your second mortgage is held by Fannie Mae or Freddie Mac, these lenders receive a standard $6,000 return no matter the short sale price. This makes for a lot less negotiation and a much quicker sale. Typically, a current short sale can be turned around within three months.
The stress of being burdened with debt or underwater on your mortgage can take an overwhelming emotional toll. But with the extension of the Mortgage Forgiveness Debt Relief Act you have more attractive and viable options to help ease your financial hardships.
And if you’re looking for a real estate attorney to guide you through the short sale process, we can help. We understand how difficult these situations can be and take a holistic approach that brings compassion and experience to your service. Contact us for a free consultation so we can review your options.