So here we are again waiting to see if Congress will extend the 2007 Mortgage Forgiveness Debt Relief Act (Act) for another year. The extension came late last year because of the Fiscal Cliff negotiations. It was finally extended as part of the American Taxpayer Relief Act of 2012 which was enacted January 2, 2013.
Why do we care? Simple….taxes. As you know when deficiencies are forgiven in a short sale by the bank/noteholder, this constitutes a taxable event. The Seller should then receive a 1099 for that amount. The next question is “does the Seller have to pay taxes on that amount?” If it is a Primary Residence (lived in the house two out of the past 5 years) then the Seller should not have to pay taxes on the forgiven amount. They will need to go to their CPA or Tax Attorney and file the right paperwork to invoke their rights under the Act but no tax should be due. The Act, however, does not help a Seller if property sold is not a Primary Residence.
If the Act is not extended into 2014, this could of course have a chilling effect on short sales and possibly the real estate market in general. We still have a huge number of properties that are underwater and need to be moved. If short sales slow down then foreclosures go up.
So let’s cross our fingers, call our Representative in Congress and pray that it is once again extended.