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UPDATE FROM ATG ADMINISTRATION:

Mortgage Forgiveness Debt Relief Act Set to Expire

Short Sale Transactions May Result in Higher Income Taxes Starting in 2013

By Christine Sparks, ATG Vice President - Managing Attorney, Claims and Audit

The Mortgage Forgiveness Debt Relief Act of 2007 (the Act), enacted December 20, 2007, is set to expire December 31, 2012. (See IRS Article, The Mortgage Forgiveness Debt Relief Act and Debt Cancellation, for answers to common questions regarding the Act.) Without the Act, homeowners would typically be responsible for any deficiency not pursued by a lender in a foreclosure action, for any loan amount forgiven by a lender in connection with a short sale transaction, or for the amount of a principal reduction. The Act allows "income"---up to two million dollars---to be excluded from income on taxes filed for an individual's primary residence. Married couples are allowed to exclude up to two million dollars. Single individuals or married individuals filing separately can exclude up to one million dollars.

There are efforts underway in Congress to extend the Act for another year. The Senate Finance Committee has approved the extension, but it still needs to pass through the full Senate. Some commentators have indicated that Congress will try and pass the extension prior to the election. However, other commentators have indicated that it will not be possible to get it done in that timeframe. Either way, many anticipate opposition to passing the extension.

What does this mean for the average real estate practitioner? If you have a client who is trying to close a short sale transaction or who is in the midst of other negotiations that might result in a lender not pursuing the deficiency, you should consider advising them to do what they can to complete the transaction during 2012. If they do not, there is a chance that they will be responsible to pay income taxes on the forgiven debt, which could mean a significant increase in taxes depending on the amount of debt that was forgiven.

ATG Members:  Click here to learn how ATG can assist with your short sale transactions through our Short Sale Coordination Department. [EDITOR'S NOTE: This service unavailable as of August 18, 2018.]

[Last update: 10-11-12]

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