Mortgage Debt Forgiveness Act May Expire in 2013
Loan modifications, short sales and foreclosures offer homeowners who are in distressed properties a few options to move past a difficult financial situation.
However, the right option isn’t always clear, especially in the market we find ourselves in.
A loan modification can act as a bridge for a homeowner who is trying to get out from under an overwhelming mortgage payment and also avoid selling or vacating the property.
For others, foreclosure was unfortunately the only option, especially when the housing bubble burst for millions of homeowners in 2007. 5 years ago, Real Estate Professionals who specialized in short sales were sometimes hard to find and most loan modification options hadn’t even been dreamed up yet by banks and the Federal government. Homes going into foreclosure so quickly meant that many families were unwittingly subjecting themselves to huge tax bills. The reason being, that before ‘07, any mortgage debt not paid by the time a home was repossessed by the servicing bank, was counted as income.
For example, a family with a combined income of $120,000 who had a $400,000 debt left on a house they walked away from now had over $500,000 in potentially taxable income and had been bumped to a much higher tax bracket in the process. Many were shocked to when Uncle Sam hit them with a jaw dropping tax bill, post forclosure.
The Mortgage Debt Relief Act of 2007 changed all that and forgave that tax burden completely, but now it’s in jeopardy of expiring by the end of 2012. This could potentially affect short sellers as well. And given the fact that the length of time required to complete a short sale started today could easily extend in to 2013, the options for underwater borrowers looking to unload their mal-investment are now very muddled.
Remember, everyone’s tax situation is different, so it’s imperative to contact a tax professional if you are weighing your options for a short sale or foreclosure that could extend into 2013. And most importantly, contact a realtor for help with your short sale, as the process varies by bank and by loan disposition.
There’s no telling whether the Mortgage Debt Relief Act will expire, but the fact that it’s a possibility is a game changer in the short sale market right now.
as written by Ross Trumble for Grayhawk Real Estate Team