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Mortgage Debt Relief Expires This Year 2012

Mortgage Debt Relief Expires This Year 2012

A major event is scheduled to take place at the end of this year, December 31, 2012, aside from being New Years Eve and a great celebration since the Mayan Calendar says the world is ending about 10 days earlier, but seriously, do you know what takes place and stops at the end of the year?

The Mortgage Forgiveness Debt Relief Act is what expires at the end of the year, a mere 237 days or 169 business days from today. “Why is this important”, you may be asking yourself? Here is the short answer, the mortgage debt which gets cancelled by your bank/lender when you sell your home for less (short sale) than you owe is forgiven.  Remember to seek legal, tax, and/or specific advice when considering these options.

Prior to the 2007 Act, if you sold your home for less than the amount you owed on your mortgage, you would have to make arrangements to repay your lender the difference, however since the Act you can get relief from paying those hefty amounts back, as well you don’t have to pay taxes on those unpaid sums either, which the IRS (Internal Revenue Service) looks at it as income.

Can you imagine paying income taxes on $100,000 of income you didn’t earn? YIKES!

Let’s review this again, the mortgage debt relief comes to light when your lender forgives the amount of debt owed by a borrower, which can happen with a short sale, foreclosure, or any other type of loan or lender workout. Usually the forgiven debt is taxable, however under the Mortgage Forgiveness Debt Relief Act and Debt Cancellation the borrower’s need to pay taxes on the amount of forgiven debt is eliminated, vanished, gone bye-bye.

Let’s review a real life situation, however the names and details have been changed.  Robert Smith bought a home in a new subdivision in Imperial in 2005, paying $375,000 for the home and took out a mortgage for the same amount.

In 2010, Robert is being relocated by his company and must sell his home.  His current mortgage balance is $360,000.

Luckily for Robert, his lender is willing to work with him on a short sale and he has found a buyer willing to purchase the home.  Robert and the buyer agree to the purchase price of $205,000, however that amount falls short of Robert needs to pay off his mortgage and pay closing costs.  Since Robert does not have enough money to bring to the closing table (escrow for us California property owners), his lender agrees to the short sale, forgiving debt in the amount of $155,000 (actually its a bit more with commissions and closing costs, etc).

Prior to the Act, Robert would have been required to declare the $155,000 as income and pay taxes on it.  Under the current provisions of the Act, taxes on Robert’s $155,000 in relief are forgiven.  For those tax payers in the 20% tax bracket that’s an amazing $31,000 in tax savings!
Lets answer a few other questions you may have:

What is the maximum debt relief allowed under the Act?  Up to $2 million may be forgiven for married couples ($1 million for single or married filing separately) and applies only to a principal residence.  If there is debt forgiven above these maximums, the homeowner is taxed at regular income rates.

Do I have to report the forgiven debt to the IRS as income since I won’t be paying taxes on it?  Yes, you will need to report the income to the IRS, see the IRS and/or tax professional for more details.

Does the Act apply to cars, boats, second homes, investment properties, credit cards, or other debt?  No, not under this provision.  Only debt relief for a principal residence applies under the Act, however you may want to consider bankruptcy relief, which is non-taxable, and that is sometimes true for insolvency as well.

Are you Upside Down on your home?  Are you receiving foreclosure notices and mortgage calls everyday?  Get FREE Short Sale Help and Information today and get the relief you need for a fresh start.

Get more information on short sales and a free information guide by going to IVShortSale.com

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