Mortgage Forgiveness Debt Relief Set to Expire

There is a key piece of legislation set to expire at the end of this year which could have a HUGE impact on the real estate market & for many homeowners wanting to sell their homes. This legislation is the Mortgage Forgiveness Debt Relief Act of 2007 which exempts homeowners from having to pay tax on up to $2,000,000 in qualified forgiven debt. Only cancelled debt used to buy, build or substantially improve a principal residence or refinance debt incurred for those purposes qualifies. Essentially this directly impacts the feasibility of homeowners selling their homes through a short sale.

As an example, let’s say Homeowner X purchased a property for $300,000 back in 2005 and got a mortgage for $275,000. Today Homeowner X can only sell that property for $200,000 and the remaining balance of the loan is $265,000 there remains a shortfall (deficiency) of $65,000 ($265,000 remaining loan balance – $200,000 sales price). With Arizona specifically being a “non-deficiency judgment” state for most primary residences, the bank is prohibited from pursing Homeowner X for the unpaid balance (please always consult a lawyer for your specific scenario), but the $65,000 deficiency is normally considered income under IRS tax law. Clearly being taxed on the $65,000 of “income” would have a huge impact on whether Homeowner X would wish to proceed with the short sale. The Mortgage Forgiveness Debt Relief Act of 2007 removed this $65,000 tax burden in many cases, making short sales much more feasible for owners by not having to incur taxes on money they never physically received.

With this legislation set to expire on December 31st, that essentially means any homeowner in a short sale situation right now who isn’t definitely closing on that house by the end of the year may have an increased tax burden should the home sell. The real estate community is certainly leading the charge to try and have this debt relief extended by Congress, but in our current “lame-duck” session the prospects of that happening aren’t likely. It’s possible that new legislation could be introduced next year and be made retroactive but there is simply no guarantee. The effects of not extending the debt relief will be widespread. This includes making it more difficult for homeowners “underwater” to sell their homes and that will further limit the already low inventory of homes on the market today.

Stephen Woodall
REALTOR, GRI @ Long Realty Company
Stephen has made real estate his full-time career and passion since 2008, primarily specializing in the Foothills & the Northwest Tucson areas of Oro Valley and Marana. He is a multi-million dollar producer, representing both sellers & buyers. Stephen has tremendous experience in new home sales, listing & selling primary residences, listing & selling vacant land, listing & selling luxury homes, investment properties, rentals, and real estate development parcels.

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