South Florida homeowners may get a legislative reprieve if the Mortgage Forgiveness Debt Relief Act that expired last year gets an extension approved by both houses of Congress. The Senate Finance Committee recently approved an extension for two years that would be retroactive for the entirety of this year.
Under provisions of the law, homeowners already struggling with debt were not responsible for federal income taxes due on mortgage debts that were forgiven by lenders on loan modifications, foreclosures or short sales on their principal residences.
Before the law was enacted, forgiven debt was taxed just like income. If the break isn’t extended, borrowers will again be responsible for taxes on written-off amounts or the reduced loan principal. These taxes can be in the five figures, and can boost a taxpayer into a much higher tax bracket.
Under present conditions, if a homeowner has $100,000 of debt canceled in a short sale, he or she could now owe a minimum of $28,000 in taxes after factoring in total income.
This was vital protection to the 350,000 homeowners in America who completed short sales in 2013. More than 300,000 homeowners are likely to undergo the same process in 2014. Short sales benefit both the lender and the homeowner, as the lenders agree to accept an amount less than the mortgage’s face value, and expensive and time-consuming foreclosures on properties can be avoided.
The bill is part of an “extenders” package, and contains numerous other provisions related to consumer housing. It must pass a full Senate vote and advance to the House, where lawmakers have been loathe to approve such measures in recent years.
Loss of this tax break would be a huge blow to homeowners struggling under a mountain of accrued debt in these unstable economic times.
Depending on many factors, it can be in a homeowner’s best interest to begin anew with a clean financial slate and to consider filing Chapter 7 bankruptcy proceedings. A Florida bankruptcy attorney can offer advice regarding your individual financial situation.
Source: Herald-Tribune, “Short-sale tax break is revisited” John Hielscher, Apr. 11, 2014