Good News from The Fiscal Cliff for Underwated Homeowners
The last minute pull back from the fiscal cliff had some good news for homeowners who are currently short selling or planning to short sell their house. As part of the tax package, Congress extended the Homeowners Mortgage Debt Relief Act for one year. This law which eliminates any income tax which would be owed on the forgiven portion of the homeowner’s mortgage debt when the personal residence is short sold or foreclosed was scheduled to expire on December 31, 2012.
The IRS has historically treated forgiven debt as income for which income tax must be paid. To my mind it always added insult to injury. It is bad enough that you have lost your home, but to now pay tax on the deficiency between what the houses sold for and what was owed to the mortgage company was a bitter pill for the home owner to swallow. Congress changed the law in 2007 to give relief to homeowners who were losing their houses (You still have to pay tax on forgiven investment debt and credit card debt) but the law was supposed to sunset on December 31, 2012. The extension gives underwater homeowners one more year to resolve their situation without incurring additional income tax, But who knows if the extension will continue after 2013.
The upshot of this extension is that if you currently owe more money on your house than it is worth, this is the year to do something about it. Consult with a real estate professional or a bankruptcy attorney to review your option. At my law firm, we are both real estate brokers and lawyers. When a client comes in, we do a competitive market analysis on their home and review the terms and conditions of their home loan. Then we are able to give an objective analysis of their situation and propose the best course of action for the client.