In 2007, during the major real estate crash, Congress passed the Mortgage Foreclosure Debt Forgiveness Act. That law expires in January 2014, which will hit the financial pockets of homeowners looking for relief in short sales, refinances, and loan reductions based on their reduced market values. The financial crisis is nowhere near over, and if you thought the real estate market was beginning to mend, this will ensure yet another financial hurdle for homeowners.
IRS says - "Normally, debt forgiveness results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude up to $2 million of debt forgiven on your principal residence."
So, the homeowners that suffered a major home value reduction that were able to avoid paying taxes on money that was forgiven, are basically out of luck in 2014. An example; a home with a mortgage at $300,000 sold in a short sale for $190,000 leaving the balance the bank had to "forgive" at $110,000. Under this act, the homeowner went on his merry way and didn't worry about paying or being taxed on the difference.
Now, beginning in January '14, that difference will be taxed to homeowners. From 2007 to 2013 that debt that was forgiven or cancelled by a lender must be included as income on your tax return and is taxable. The ramifications are tremendous for taxpayers.
Consumer advocates consider the tax unfair: "The money being taxed was 'phantom income' that existed only on paper," said Elyse Cherry, CEO of Boston Community Capital, a non-profit, neighborhood stabilization group.
The biggest problem with the Mortgage Forgiveness Debt Relief Act being cancelled is that it will create a situation where homeowners are less likely to negotiate with banks, and more likely to walk away - letting the home foreclose. In doing so, putting the housing market back where it started when the housing market crashed.
Chances of passing an extension before the year's end seem slim, according to J.P. Delmore, an assistant vice president for government affairs at the National Association of Home Builders.
The hope is that Congress will reinstate this important break for Americans in 2014, as it is essential to the ongoing housing market recovery.
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