Topic Summary: Five years ago, at the start of the housing crisis,
Congress passed a law called the Mortgage Forgiveness Debt Relief Act. The MFDRA would prevent homeowners from paying tax on the amount of any debt forgiveness.
This provision is set to expire, as designed, on Dec. 31st. If allowed to expire through Congressional inaction, homeowners who will get underwater workouts may be liable for paying taxes on the amount of forgiven dept. Also, a growing number of homeowners who will conduct a "short sale" in 2013 may also be liable for paying taxes. As an example almost 30% of all recent sales in California were "short sales" and in Nevada about 25% of all sales were "short."
The IRS Does Not See It The Same Way!
It would appear that homeowners who got in trouble over the last few years because of money problems probably couldn't handle the mortgage situation they were in and a "life line" (work out) was offered and excepted. Next year, homeowners who do a work out, will have a surprise tax event that may cause more long term negative pressure with what's owed to the IRS and the states. To see what is exactly covered and other tips, the IRS offers this resource HERE.
How does the tax provision work? Without the tax measure, a homeowner who owes $400,000 on his mortgage and sells his house for $300,000 would owe income taxes on the difference of $100,000, the amount that's forgiven. The $100,000 would be considered regular income by the Internal Revenue Service and in many states. The reason being, many state tax income sources the same way as the IRS. This could take away some of the incentive for homeowners to seek a short sale.
What Would It Cost To Renew? Renewing the provision for two years, as President Obama proposed earlier this year, would cost the Treasury Dept. $2.7 billion, according to the Congressional Budget Office.
Timeline: There will be a lot of activity in Congress after the election and overall, the spirit of "giving" is not something that is trendy in Washington these days. There has been bi-partisan support for the extension, it's just a matter of getting focus in Congress.
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