According to the IRS, if you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be considered taxable income.
The Mortgage Debt Relief Act of 2007 was enacted to allow taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a short sale or a foreclosure, qualifies for the relief. This Act is set to expire at the end of 2012.
As home prices spiraled downward and millions of homeowners became underwater on their mortgages (owing more than their homes were worth) during the housing crisis, this measure was needed so consumers who were already financially devastated could pick up the pieces and move on with their lives. If this act is not extended, it means that anyone who is going through a loan modification, short sale or foreclosure in the future will face a potentially huge tax bill associated with the money they “lost” on their homes.
Despite some positive signs of recovery, our nation’s real estate market is still fragile. Consider the following:
- Transactions not completed by year-end could become taxable in 2013, despite a borrower’s reliance on this tax relief.
- More than 20% of current homeowners with a mortgage owe more on their homes than the current fair market value but many homeowners are trying to hang on to their homes and pay their mortgages. Any change in finances, marital status, employment or health can force them to sell as a short sale or be foreclosed upon.
- Nationwide, over a quarter of all home sales still involve a distressed property.
If Congress does not extend this tax relief, it will most certainly hurt the housing recovery. Neither consumers nor the housing market need that added burden. Homeowners shouldn’t be forced to pay a tax on money they’ve already lost with cash they never received.
The housing market, while recovering, is still fragile enough that this tax relief is needed in 2013 and possibly beyond.
The Scott Loper Team includes Scott & Lisa Loper at Keller Williams Real Estate, 601 Bethlehem Pike, Bldg. B, Ste. 100, Montgomeryville, PA 18936, (215) 631-1900, www.ScottLoperTeam.com.