The Mortgage Forgiveness Debt Relief Act and Debt Cancellation expired December 31, 2013 and barring any unlikely last minute action from Congress, it will not be revived. This is not good news for homeowners facing foreclosure, loan modification, or considering short selling their home, because it means they may be facing a large income tax bill on any debt “forgiven” by the their home lender. This most likely will come as a shock to many unprepared homeowners at the end of the 2014. While lenders have negotiated debt, the Internal Revenue Service (IRS) typically does not.
The good news is, if you are facing this situation and you are prepared, there could be a solution.
What is The Mortgage Forgiveness Debt Relief Act and Debt Cancellation?
The Mortgage Forgiveness Debt Relief Act of 2007 was a temporary law enacted by Congress intended to help homeowners through the mortgage foreclosure crisis. Typically, if you borrow money from a lender and the lender later cancels or forgives the debt, that forgiven debt is considered by the IRS to be “income” to you for tax purposes. You are required to report it to the IRS on your return and to pay taxes on it. Under the Mortgage Forgiveness Debt Relief Act of 2007, taxpayers were allowed to exclude their principle residences. In other words, if you reduced your debt through mortgage restructuring, such as modification, or had any debt forgiven in connection with a foreclosure under the provisions of the Act, you did not have to report the amount forgiven as income on your tax return. Thus, you did not have to pay taxes on it.
Why did The Mortgage Forgiveness Debt Relief Act and Debt Cancellation Expire on December 31, 2013?
The Mortgage Forgiveness Debt Relief Act of 2007 was never intended to be a permanent measure. It was enacted to provided temporary relief to homeowners during the mortgage foreclosure crisis. If already had been extended twice. This year, to date, Congress has opted not to extend it. Thus, it expired as of midnight December 31, 2013.
What does this mean to you if you are a homeowner facing foreclosure, loan modification, or planning to short sell your home in 2014?
You most likely will be facing a significant income tax bill at the end of the year. Whereas, lenders have been willing the negotiate debts owed to them, the IRS most likely will not. Once you owe the tax, you owe the tax. The government usually is willing to set up installment plans to allow you to pay off the tax burden, but this still can have far-reaching consequences.
So, if you are in this situation, what can you do?
Not all Cancellation of Debt income is taxable. There are a few, very narrow exclusions. One of these is bankruptcy. Debts discharged through bankruptcy are not considered taxable income. If you are unable to pay your mortgage, need to modify your mortgage, may be facing foreclosure, or are considering short selling your home, before you take any action, please call an attorney experienced in dealing with, residential foreclosure, and Chapter 7 and Chapter 13 bankruptcy. It is imperative you consider all your options before making a decision because there may be hidden consequences, such as this income tax situation. Sultana Law has handled hundreds of cases involving mortgage foreclosures, loan modifications, short sales, and Chapters 7 and 13 bankruptcy.
To learn more about The Mortgage Forgiveness Debt Relief Act of 2007, visit the IRS website.