• Dec. 27, 2007 - Mortgage Forgiveness Tax Relief Act signed into Law
Good News If You SHOULD Have to Short Sell
On December 20th President Bush signed into law the Mortgage Forgiveness Tax Relief Act. The gist of this legislation is to eliminate the income tax due on the portion of debt that the bank "forgives" in a short sale, or a foreclosure or in certain instances where the bank agrees to refinance a new smaller mortgage and forgives the portion that the house has declined in value - which IS now sometimes taking place.
In my article in short selling I mentioned that one of the risks is that the bank would issue a 1099 to the borrower for the portion they did not recover in a short sale or foreclosure. Previous to this legislation that 1099 for debt forgiveness would be considered income in the eyes of the IRS and would be taxed at the borrowers tax rate.
This law would eliminate a taxable gain on borrowers who received a forgiveness of debt from a lender in a short sale. Normally, if a lender forgives the debt, to this extent the homeowner would have a taxable gain. HR 3648 would eliminate this "phantom income" on a borrower's principal residence. The law applies to all debt forgiven from Jan 1, 2007 and on.
Note though that this legislation is ONLY for a borrowers principal residence. MANY of these short sales here in Southwest Florida are for either 2nd homes or investment property and this does not offer any help in that case. You would of course want to consult with a tax professional before filing next year if this turns out to be in your future. And in Sarasota it's in a LOT of futures. I have 10 active listings right now and at least half ARE short sales or have the potential to be one if the market declines further. Below is a statement by the National Association of Realtors regarding the legislation.
By the way I can't emphasize enough - talk to a Realtor who has DONE short sales BEFORE you get in trouble missing payments on your mortgage. You need to understand your options and I note now that some banks are making "Deed in Lieu of Foreclosure" seem "easy" - they don't disclose that this is every bit as bad on your credit AS a foreclosure and in MOST cases there are better workarounds.
- Mike W.
http://www.realtor.org/press_room/news_releases/2007/president_bush_signing_mortgage_forgiveness.html |
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Real Estate Market statistics, buying, selling strategies, financing, insurance for Sarasota, Siesta Key and the barrier islands from Ann & Mike Winger, REALTORS with REMAX Tropical Sands.
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• Jan. 30, 2008 - RE: Mortgage Forgiveness Tax Relief Act signed into Law