For those taxpayers contemplating, or in the middle of, a Foreclosure or Short Sale you must act quickly before relief under the Mortgage Forgiveness Debt Relief Act expires on December 31, 2012!
An important and widely-used federal income tax provision providing tax relief on mortgage debt forgiveness is quickly reaching its expiration. Unless this provision is extended, it will expire on December 31, 2012, significantly effecting homeowners who are in the middle of a foreclosure or short sale or who are still facing those processes in the future. Since foreclosures and short sales can take many months, this expiration will affect those who are in the middle of the process, but will not close until next year. Foreclosures and short sales are still the only options for many homeowners. In fact, it has been reported that more than a quarter of a million short sales were completed in the first quarter of 2012 alone. Clearly, this tax relief has proved to be extremely valuable to many U.S. taxpayers.
Generally, the forgiveness of debt, including a mortgage or portion of mortgage the bank forgives in a foreclosure or short sale, is subject to federal income tax. However, the Mortgage Forgiveness Debt Relief Act of 2007 was enacted on December 20, 2007 (see News Release IR-2008-17) to provide relief to the many struggling homeowners. This important enactment has been allowing taxpayers to exclude the discharge of debt on their principal residence from their taxable income. The Mortgage Forgiveness Debt Relief Act was a temporary tax provision through 2009, which was extended through the end of this year.
The Mortgage Forgiveness Debt Relief Act sets limits of up to $2,000,000 of foreclosure debt or up to $1,000,000 for married taxpayers filing separately. The relief applies to mortgage restructuring, foreclosures, and short sales when the bank forgives the remaining balance due. To qualify, the taxpayer must have used the debt to buy, build, or substantially improve his or her principal residence and be secured by that residence. Refinanced debt used to substantially improve the taxpayer's principal residence also qualifies. However, debt forgiven on second homes, rental properties, business property, credit cards, or car loans do not qualify.
If the Mortgage Forgiveness Debt Relief Act is not extended, the insolvency exclusion may help taxpayers avoid paying taxes on the canceled debt resulting from their mortgage or short sale. Under the insolvency exclusion, the IRS cannot tax an insolvent taxpayer on forgiven debts. Another exception includes exclusion if the debt was discharged in a Title 11 bankruptcy. These exclusions, as well as the Mortgage Debt Relief provisions, require the filing of Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, with the IRS.
For those homeowners in the process of a foreclosure or short sale, any attempt to get the bank to close prior to December 31, 2012, would be extremely beneficial to you. Your closing prior to the expiration date will allow you to take advantage of this relief provision on any forgiven debt.
The tax attorneys at Bucci Law Offices can help you take advantage of the expiring Mortgage Debt Forgiveness legislation to exclude qualifying debt from income and analyze the potential tax consequences of your real estate transaction. However, you must act fast before December 31, 2012, if you have had a loan forgiven or in the process of a short sale or foreclosure in order to benefit.
Each second you delay is costing you money! How long can you afford to do nothing?
Call an experienced tax attorney at Bucci Law Offices now at 954-764-4440 to learn more about how we can help you with your tax resolution!