Note; This is almost a month old, I did this just before the “fiscal cliff” was averted. At the time it seemed incredible that you would be forced to pay income tax on money that was forgiven. It still does. But see end of story __ no worries now. Sally
(Excerpted from Les Christie’s article in CNN Money, Dec. 24.)
The Mortgage Forgiveness Debt Relief Act of 2007 will fall over the fiscal cliff on Dec. 31 along with the thundering herd of other tax breaks due to expire that day unless Congress can get itself together in the next few days and get a deal done.
The act forgives the “savings” people realized who have lost their homes to foreclosure, short sale, or had their mortgage reduced from being considered “income” by the IRS and therefore taxable. Can you believe it? Pulled back from the brink by having some of your home debt forgiven (for many of us after months of anguish and battles with our bank) we now may have to pay income tax on the “savings”.
If you are in the 25% tax bracket and had your mortgage cut $50,000 like we did or, if your $150,000 home sold at foreclosure for $100,000 the $50,000 “savings” now becomes a $12,500 tax bill.
And it doesn’t stop there. More than 50,000 homeowners are still loslng their homes nationally to foreclosures each month and the number of short sales has tripled over the last three years to a rate of about half a million a year.
The most evident hit will be that sellers now considering a short sale won’t and might battle on to the bitter end at the courthouse steps, prolonging the housing crisis. Also, under that huge 25 billion dollar lawsuit settlement roughly one million borrowers may have their mortgage debt reduced through principal reduction over the next few years. These too might reconsider, adding to the problem.
Update on Jan. 19, 2013 : The Mortgage Debt Forgiveness Act has been extended another year according to the California Association of Realtors. The extension was included in the last-minute compromise reached by Congress. Also, a bill is on the floor of the California legislature to exclude forgiven mortgage debt from state income taxes as well.