The Mortgage Debt Relief Act of 2007 is to expire at the end of 2012

This is not the normal newsletter but hope the information may help someone avoid a tax bill. It is not meant to be tax advice- those under these circumstances should contact their tax professional soon.

Some on this email list may know family or friends with a mortgage in trouble. If considering or in the process of a short sale, foreclosure, or deed in lieu time is of the essence. They process must be COMPLETED before January 1, 2013 if at all possible.

Just what does it mean? In 2007 President Bush signed the Mortgage Debt Relief Act which is set to expire at 11:59:59 on December 31, 2012. Under this Act the “IRS allows taxpayers to exclude income from the discharge of debt on their primary residence”.  Distressed property sales are approved by the lender as they are receiving less than the loan amount at time of sale. The lenders are to prepare an IRS form 1099 for the shortfall  for the homeowner and that amount is taxable as income. The Act forgives taxes owed on the amount of shortfall.

For example: If the loan balance is $225,000 and the home sells for $175,000 there is a $50,000 shortfall to the bank. Homeowners in the 25% income tax bracket would owe the IRS $12,500 and $7500 if in the 15% bracket. Homeowners would still owe if the home sold and the bank had not given them a letter of forgiveness.

There has been no mention of extending the Mortgage Relief Act or even including “pending sales” as December 31, 2012 approaches. Those finding themselves in a distressed sale situation need to move quickly as time is running out. Hopefully, the Act will be extended but at this time that cannot be counted on. The expiration of the Act will add severe hardship to those that can least afford it. With the election all but over it is time to ask your members of congress to extend The Mortgage Debt Relief Act of 2007. Anyone possibly facing a distressed sale situation should contact their tax professional for advise.

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