Time is Running Out for the Mortgage Forgiveness Debt Relief Act

A typical short sale takes 4-6 months to close. The banks are stating they are processing them quicker but it’s too early to see the results. The Mortgage Forgiveness Debt Relief Act expires 12.31.12. You can do the math and see that in order to get a new short sale to closing by then time is running out. Your home must be listed very soon. In a short sale the home is listed for fair market value. The bank doesn’t start their process until an offer is presented by a buyer and accepted by the seller. Then the bank starts to evaluate if you qualify to do a short sale and if the offer is a good one. This typically takes quite a bit of time.

This is a very big deal! After 1.1.13 the seller will be responsible for taxes on any debt that is forgiven or canceled.

 The following information is straight from the IRS website: http://www.irs.gov/individuals/article/0,,id=179414,00.html

If you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be taxable.
The Mortgage Debt Relief Act of 2007 generally allows 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 foreclosure, qualifies for the relief.
This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.

If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is normally reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.

Amy Kohlin
EXIT Las Vegas Realty Center

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