That’s a great question and it’s a sure bet that many homeowners’ are waiting to find out. If you work in the real estate industry you are well aware of this law and it’s applications but if you don’t, here’s what it means:
Many times, a homeowner that can no longer afford to pay their mortgage might decide to sell their home for less than what is owed on it in order to avoid a foreclosure. This is known in the industry as a “short sale”. Under normal circumstances if the lender approves the short sale, the seller is still required to pay taxes on the amount of unpaid debt or that is to say, the difference between what the home sold for and what was actually owed to the bank. If the homeowner sold the home for $200,000 but the remaining balance on the mortgage was $275,000 they would be required to pay taxes on the $75,000. As you can imagine, this can add up to a lot of money.
Currently Congress is deciding whether to reenact the law and also to make it retroactive all the way back to January 1st of this year. Although this gets a bit complicated the bottom line is that although the Senate Finance Committee has already approved reenactment the act is part of a larger package of tax benefits and as a result the Senate Majority leader is refusing to allow further votes until the November elections. This means that although Congress may ultimately vote to reenact the Mortgage Forgiveness Debt Relief Act it may not happen until after November.
If you are the current owner of a distressed property this is a very important situation because of the current tax liabilities incurred when selling your home on a short sale. According to the NAR (National Association of Realtors) this spring short sales accounted for only 4 – 5% of home sales as compared to as much as 12% in recent years. Many experts feel that there is an excellent chance that the act will be renewed but say it could be as late as next spring. That is an eternity for homeowners that need to make a decision that will affect them for many years to come.
Does this mean that people should not consider a short sale as a solution to their financial problem? Actually, no. But it does mean that although a short sale remains the answer for some homeowners, there are also better options available for others. It all depends on each person(s) circumstances. One thing is for certain however, the ability to not be taxed on forgiven debt is a huge benefit for those persons that find themselves in this type of situation and the reenactment of the Mortgage Forgiveness Debt Relief Act would be of great help to them just as it has been in the past.