You may have heard the news by now, the Mortgage Debt Relief Act, that was extended until December 31, 2013, has expired. The Act was put in effect in 2007, during the housing-bubble burst, and has been extended annually since then, until last year. It is meant to exempt people from the high taxes they may owe as a result of a forgiven mortgage debt.
For example, if someone owes $300,000 on their mortgage and proceeds with a short sale where the home is bought for $200,000 and the remaining $100,000 is forgiven through a deficiency waiver. The Internal Revenue Service considers a forgiven debt as income, thus people are expected to pay income taxes on that amount.
The act was passed not only to assist people that are already in financial binds, but also to prevent IRS from being backlogged with insolvency claims â€“ which may also free someone from a tax burden on forgiven debt.
Why we’re not worried
This definitely won’t be a permanent solution. However, the number of mortgages currently underwater is still very high. Not renewing this act would result in further delaying the recovery of our weak housing market. Particularly considering that new mortgages grew significantly more last year than any other year since the recession and buyer confidence is regaining strength, this would definitely be untimely to not renew the act for 2014.
Congress is aware of the impact that not renewing the act would have on the economy as a whole. At the moment there are two bills in the House and one in the Senate for an extension of the act or similar debt relief. At Graham Legal, we’re very interested to see how congress will address this issue over the next few months, we will be sure to provide any updated information.