Real Estate Information Archive

The Mortgage Debt Forgiveness Act, originally passed in 2007, was extended three times to protect homeowners from paying income tax on debt that was relieved due to Foreclosure, short sales or deed in lieu of foreclosure.

The law expired on December 31, 2016 and unless it is extended again, homeowners with debt relief in 2017 may be subject to tax.

A homeowner might feel a sense of relief without the obligation of a delinquent mortgage but just because the payments are no longer due doesn’t mean that there isn’t another obligation that replaces it. If a lender cancels or forgives debt, a taxpayer must include the cancelled amount in their income for tax purposes depending on the circumstances. The tax significance could be serious.

This previously allowed relief only applied to a taxpayers’ acquisition indebtedness of their principal residence which did not include second homes and investment property. The maximum amount was limited to $2 million of mortgage debt forgiveness or $1 million if filing separately.

Due to the serious consequences involved in short sales and foreclosures, it is advised that homeowners faced with this possibility should seek expert advice from their legal and tax professionals.

If you or someone you know is looking to buy, sell or rent a home, please call DeHanas Real Estate Services at 301-870-1717.

During the Great Recession, some homeowners elected to rent their home rather than sell it for less than it was worth. IRS tax code allows for a temporary rental of a principal residence without losing the exclusion of capital gain based on some specific time limits. During the five year period ending on the date of the sale, the taxpayer must have:

• Owned the home for at least two years

• Lived in the home as their main home for at least two years

• Ownership and use do not have to be continuous nor occur at the same time If a home has been rented for more than three years, the owner will not have lived in it for two of the last five years.

So the challenge for homeowners with gain in a rented principal residence that they don’t want to have to recognize is to sell and close the transaction prior to the crucial date. Assume a person was selling a property which had been rented for 2 ½ years but had previously been their home for over two years. To qualify for the exclusion of capital gain, the home needs to be ready to sell, priced correctly, sold and closed within six months. All of the gain may not qualify for the exclusion if depreciation has been taken for the period that it was rented. Depreciation is recaptured at a 25% tax rate. A $200,000 gain in a home could have a $30,000 tax liability. Minimizing or eliminating unnecessary taxes is a legitimate concern and timing is important. Selling a home for the most money is one thing; maximizing your proceeds is another. For more information, see IRS publication 523 and an example on the IRS website and consult a tax professional.

Special consideration is made by IRS for the sale of a jointly-owned principal residence after the death of a spouse. Surviving spouse may qualify to exclude up to $500,000 of gain instead of the $250,000 exclusion for single people if certain requirements are met.

• The sale needs to take place no more than two years after the date of death of the spouse.

• Surviving spouse must not have remarried as of the sale date.

• The home must have been used as a principal residence for two of the last five years prior to the death.

• The home must have been owned for two of the last five years prior to the death.

• Survivor can count any time when spouse owned the home as time they owned it and any time the home was the spouse’s residence as time when it was their residence.

• Neither spouse may have excluded gain from the sale of another principal residence during the last two years prior to the death.

If you have been widowed in the last two years and have substantial gain in your principal residence, it would be worth investigating the possibilities. Time is a critical factor in qualification. Contact your tax professional for advice about your specific situation. Contact me to find out what your home is worth in today’s market. See IRS Publication 523 – surviving spouse. 

We have just been made aware of an erroneous Facebook posting that if people opt out of buying health insurance and don't pay the penalty for not having it, the Internal Revenue Service will be able to put a lien on their home.  THIS RUMOR IS FALSE. 

Here is a third-party independent article that fully explains what the IRS can and cannot do to taxpayers who opt out of buying health insurance and don't pay the penalty.

There's the old saying that two things in life are certain; death and taxes! Taxes are the hot topic these days, and our friends at Southern Maryland Law have some great advice for tax payers.

http://www.southernmarylandlaw.com/tax-time-is-the-best-time-for-preventative-legal-medicine/

Bank of America would like to inform the real estate agent community that Congress has extended the certain provisions of the Mortgage Forgiveness Debt Relief Act through the American Taxpayer Relief Act of 2012 until December 31, 2013. This act benefits qualified homeowners who may have otherwise owed taxes on forgiven debt after going through a short sale.

Homeowners will continue to receive their 1099-C forms. Please keep in mind that homeowners should always consult their tax advisor so they can evaluate their personal situation and understand their tax payments.

The Debt Forgiveness Act, scheduled to expire on December 31, 2012 could impact many homeowners of distressed properties. Those are homes in a state of pre-Foreclosure where homeowners are attempting to avoid foreclosure by selling them as a short sale.

Federal tax law generally requires that a taxpayer who has indebtedness that is forgiven by a lender is required to claim and pay taxes on the amount of the forgiven indebtedness, which is classified as "income." As a result, prior to 2007 homeowners whose homes were foreclosed upon or who completed short sale transactions (or received principal reductions in loan modifications) were potentially required to pay taxes on the amount of indebtedness which was forgiven in those transactions. The Mortgage Forgiveness Debt Relief Act of 2007 was passed by Congress in order to modify the law by providing taxpayers who met certain requirements an exemption from taxation on the forgiven indebtedness. That law, however, is scheduled to expire at the end of 2012 and, unless extended by Congress, will result in the loss of this exemption and the imposition of additional and potentially significant taxes on thousands of distressed homeowners.

More than 50,000 homeowners go through Foreclosure each month and the number of short sales has increased significantly over the last few years to approximately 500,000 per year. In addition, as a result of the $25 billion foreclosure irregularity settlement which the nation's largest mortgage lenders recently entered into with the federal government, thousands of homeowners may receive principal debt reductions over the next few years. Although an extension of the exemption would seem to be a "no brainer," the fact that Congress is entering a "lame-duck" session creates the possibility that little legislation will move ahead through the end of the year.         

Even if the law does expire, some homeowners will still be eligible to exclude the income from forgiven indebtedness. For example, if the debt is discharged in bankruptcy or the homeowner is "insolvent" (meaning they have more debt than assets) at the time of the debt forgiveness, no tax is due. But homeowners who are considering a short sale and their agents should take this pending expiration into account and seek competent legal or tax advice so they will be prepared for the ramifications to them, if any, that will result if the law is not extended by Congress prior to the end of the year.

Thinking of short selling your home? 2012 is the year to do it because beginning in 2013, the Federal Government will require homeowners to pay income taxes on their short sold home. Make the difficult decision now: What to do with your underwater home?

A short sale home is the sale of a home in which the value of the property is less than the balance of the mortgage or liens owed against the property.  The lender agrees to the terms of the deal, and releases the property to the buyer. For buyers it is a good deal and for the sellers it helps them avoid bankruptcy or Foreclosure. But the rules governing income tax for homeowners short selling their homes are about to change.

The Mortgage Debt Relief Act, which is set to change in 2013, was passed by Congress five years ago when the national housing market went bust. The IRS has allowed income tax to be excluded from the short sale on a home up until 2013. After December 31^st, the rules change and homeowners who have not closed their short sale deals will face paying income tax on the sale.

The law breaks down like this:

A house sold for $50,000 less than what is owed on the mortgage means the selling homeowner will owe federal income taxes on that sale. Typically a homeowner would pay $12,500 if they are in the 25 percent income bracket or $7,500 if they are in the 15 percent income bracket.

The IRS will forgive up to $2 million this year and $1 million if one is married and filing separately.

If the lender has not formally forgiven the debt before December 31^st, the homeowner is still on the hook to pay income tax. The bank must officially sign off on the deal before the end of year.  Lenders have been “gearing up” for the process as it often times takes up to 6 months or even a year for a short sale home to close. 

Homeowners declaring bankruptcy may avoid having to pay income tax on a short sale as bankruptcy tends to trump everything. Federal guidelines also allow a homeowner to not pay income tax if their debts exceed the value of their assets.

Now is the time for homeowners considering listing their homes as short sales to take action and start the process because beginning in 2013, the amount a lender forgives on short sale or Foreclosure will be subjected to federal income tax.