On December 31, 2013, the Mortgage 
Debt Relief Act of 2007 expired. It is the middle of March, almost the end of the first quarter of 2014, yet Congress still has not reinstated this much needed law. In 2007, this Act went into effect to assist millions of homeowners who lost their home to foreclosure or sold it through a short sale. The Act provided tax relief to homeowners by not counting the debt forgiven as income.
Normally, the amount of debt forgiven after a foreclosure or short sale is counted as income, and the individual must pay taxes on that amount. For example, if a homeowner owes $200,000 on a mortgage, but that person is only able to sell the home for $150,000, the IRS counts the $50,000 of debt that the bank forgives as income. The homeowner would then have to pay taxes on that $50,000. Thankfully, after the real estate market crashed, the Act prevented that from happening. It was a much needed law considering that individuals who face foreclosure or a short sale tend to be in a tough financial position and can’t afford the additional tax bill.
Now, that unfortunate scenario may be a reality for millions of homeowners still struggling financially or underwater on their homes. Even though the economy has improved and the real estate market has rebounded markedly, there are still millions of people whose home values are below what they owe on their mortgage. Now, without the reinstatement of the Act, those individuals who find they need to do a short sale or end up in foreclosure may get hit with a tax bill of thousands of dollars in 2015 because the debt that is forgiven will be counted as “income.”
Remember, the banks that hold such mortgages CAN STILL write off the losses. At this point, with the economy still gradually recovering and many people still trying to find their footing, it isn’t right that the average homeowner has to face further financial distress. Congress has to reinstate the tax break to protect average Americans and preserve the recent economic progress. This issue is particularly important for Florida given that parts of the state are still encountering high rates of foreclosures and short sales.
Obviously, Congress has a tendency to allow tax breaks to expire for a bit and to reinstate them retroactively. The fact that we are three months into this year and this hasn’t happened is rather perturbing. Uncertainty over this issue may stall the recovery and have any number of socioeconomic repercussions. There is bipartisan support for this measure so Congress needs to get on it already! Write to your representatives and senators! And, if you do find that you need to navigate the tricky waters of a short sale, please contact us as we have agents who are Certified Distressed Property Experts (CDPE).