You may have heard already, the rumors are true. The Mortgage Forgiveness Debt Relief Act was extended for the year of 2014, it is applied retroactively from Jan. 1, 2014 – Dec. 30, 2014. This is something we’ve been tracking here, at Graham Legal, since its expiration at the end of 2013.
The Mortgage Forgiveness Debt Relief Act is what has allowed many homeowners since 2007 to short sale their property or turn it over to the bank via a deed-in-lieu without a major tax penalty. Without this act in place, the homeowner would have to pay taxes on the amount forgiven on the loan. Meaning that if a homeowner owed $150,000 on their home, but then had a short sale for $50,000, the original homeowner would have to pay taxes on the $100,000 difference, as if it had been received as regular income.
The act served as somewhat of an incentive to avoid foreclosure, particularly in states such as Florida, where the foreclosure process is lengthy. Having delayed the extension of the act is evident, seeing as Fannie Mae and Freddie Mac services completed 27,800 short sales during the first eight months of this year, compared to last year’s 87,740.
Overall, this is good news for homeowners who participated in a loan modification, a short sale or surrendered their home through a deed-in-lieu. Most of our clients, whom defaulted on their mortgage, did so because they were facing financial hardship, so we’re happy to share that there is one less thing to worry about early next year when filing your taxes.