From The KCM Crew, http://www.KCMblog.com
As the year winds down, we are getting more and more inquiries about the Mortgage Forgiveness Debt Relief Act of 2007 and whether or not it will be extended past its original expiration date of December 31, 2012. This is important as people who are selling their home through a short sale may be faced with a tax liability if they don’t close by the aforementioned date.
Here is the way the IRS explains the tax liability:
“If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is normally reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.
Here’s a very simplified example. You borrow $10,000 and default on the loan after paying back $2,000. If the lender is unable to collect the remaining debt from you, there is a cancellation of debt of $8,000, which generally is taxable income to you.”
What does the Act accomplish?
Let’s go back to the IRS for the explanation:
“Normally, debt that is forgiven or cancelled by a lender must be included as income on your tax return and is taxable. But the Mortgage Forgiveness Debt Relief Act allows you to exclude certain cancelled debt on your principal residence from income. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.”
(For more information on the ACT from the IRS, click here)
This relief also applies to most short sales. Therefore, the question of whether or not the Act will be extended is crucial for anyone considering selling their house through the short sale process.
Will the Act be extended past the end of the year?
No one knows for certain. Diana Olick of CNBC recently reported on the issue:
“So what is the possibility of congress extending the tax relief? One Hill-watcher puts it at 60-40. The Senate Finance Committee passed a package of tax extenders right before the recess, including a one year mortgage relief extension, but leadership in the House of Representatives has not figured out how it wants to handle these extenders. With the looming ‘fiscal cliff,’ tax cuts are an increasingly tough sell. This particular extension does have bipartisan support, but that doesn’t always mean passage in Congress, especially around a presidential election.”
Without knowing whether the Act will be extended, we suggest anyone considering selling via the short sale process do it now.
From The KCM Crew, http://www.KCMBlog.com
A foreclosure, in most cases, leaves the block with a vacant home. A short sale does not. A vacant house in a neighborhood creates several challenges:
- It doesn’t contribute to the tax base of the region.
- It can be an eyesore and bring down the image of the area.
- It can be a breeding ground for insects (example: mosquitoes, ticks, etc.).
- It can be an incubator for crime if occupied by vagrants or transients.
- It can create safety issues for children (example: unguarded pool).
If a short sale is the result rather than a foreclosure, it is much better for the neighborhood.
by The KCM Crew, www.KCMBlog.com
Several pricing indices have reported that, on a month-over-month basis, home values have ticked up slightly over the last quarter. This has caused some to call the bottom to the housing market – at least from a price standpoint. We must realize that prices are determined by supply and demand.
Demand has indeed shown improvement in many parts of the country. However, the supply side of the formula is being impacted by legal issues. The number of foreclosures coming to market has been slowed dramatically by the courts as the banks still struggle with improperly filed paperwork. This inventory will eventually find its way to the market and again put downward pressure on values.
If you are selling, there currently is a window of opportunity to get your best price before the distressed properties are released.