One of the most important pieces of real estate and tax legislation is set to expire at the end of 2012. The Mortgage Forgiveness Debt Relief Act has benefited countless borrowers who have sold their home in a short sale and had their debt “forgiven” by their lender.
For a brief explanation of how this works, here is a quick interview with Bob Massi, a well-known real estate attorney, author, and legal analyst:
Essentially, in a short sale, the goal is to have the seller’s lender “forgive” the deficiency (the amount of the loan not repaid). This will result in the seller receiving a 1099-C for the given amount and would normally result in taxable “income” of that amount. But this law provides for that 1099-C to be un-taxed (up to certain amounts). This is a really big deal, because it means that a short sale has potentially huge benefits for a struggling borrower. It motivates them to complete the short sale and avoid foreclosure. This typically means a higher sale price, a lesser impact on the seller’s credit, and greater revenue for the lender.
According to the IRS website, the maximum amount that can be treated as “qualified principal residence indebtedness” is $2 million! That would just about cover most of the high-end luxury short sales in the Asheville and Hendersonville, NC areas.
Since the law is set to expire at the end of 2012, the forecast for 2013 and beyond is very uncertain. The benefits of a short sale would be greatly reduced if the borrower could have their mortgage debt forgiven only to be re-burdened by debt to the IRS. But according to Bloomberg, Congress is already working towards extending the law. It sounds like a no-brainer to do so, and there really shouldn’t be any political reason not to extend it.
The IRS website has more info on The Mortgage Debt Forgiveness Relief Act. Any borrower considering a short sale should also consult with an attorney or tax professional regarding their specific circumstances.