Debt Relief Act Extended until December 31, 2013Subscribe to Rss Feed
MORTGAGE DEBT RELIEF ACT EXTENSION
As Expected, Congress has extended the expiration of the Mortgage Debt Relief Act of 2007 until December 31, 2013. Millions of Americans anticipating debt forgiveness from their lenders either through a short sale or via a principal reduction as part of a loan modification kept a close eye on Congress during the final months of 2012 hoping that the Mortgage Debt Relief Act would be extended. When it was clear that, although most members of Congress supported the extension, the extension was not going to be granted by December 31, 2012, many homeowners began to push as hard as possible to either close their short sale by the end of 2012 and/or have their final loan modification paperwork state that their principal forgiveness would take place in 2012, not January 1, 2013. To say the least, these homeowners were extremely stressed by the possibility that they could be facing substantial tax liabilities for resolving their housing issues.
The Mortgage Debt Relief Act allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure or short sale qualifies for the relief. The Mortgage Debt Relief Act was set to expire at the end of 2012 so debt forgiveness that would otherwise be non-taxable through December 31, 2012, would become taxable starting January 1, 2013.
When asked about the number of phone calls he received regarding the Mortgage Debt Relief Act California Attorney and Real Estate Broker Michael Gaddis stated, “My office received countless phone calls from distressed homeowners that were extremely concerned about the expiration of the Mortgage Debt Relief Act. These homeowners were extremely stressed out at the possibility of having huge tax liability as a result of debt forgiveness.”
It is important to note that not all debt forgiveness qualifies for relief under the Mortgage Debt Relief Act. The Mortgage Debt Relief Act is applicable to secured debt that was incurred as a result of improving, building or buying a primary residence and refinanced debt that was incurred as a result of a rate and term refinance or a cash out refinance with the specific purpose of home improvement. There are limitations of the amount of forgiven debt that can be excluded and the Mortgage Debt Relief Act does NOT exclude debt incurred from debt forgiveness on rental properties, second homes, commercial properties, car loans or credit cards. Homeowners should visit the IRS website at http://www.irs.gov/individuals/article/0,,id=179414,00.html or consult a tax professional to ensure that their situation qualifies under the Mortgage Debt Relief Act.
The moral of this story is for distressed homeowners to figure out what course of action that is best for them and move as expeditiously as possible. There is no guarantee that Congress will grant another extension to the Mortgage Debt Relief Act. The homeowners that were facing huge tax implications if the Mortgage Debt Relief Act was not extended after the end of 2012 can attest to the fact that distressed homeowners need to act as quickly as possible. Michael Gaddis recommends that distressed homeowners take action now and not wait hoping to stay in their house as long as possible without making payments. “The money that a homeowner saves by staying in their house without making payments will seem like peanuts if they push their luck too far and the Mortgage Debt Relief Act is not extended again,” said Michael Gaddis.