The Mortgage Tax Debt Relief Act is set to expire on December 31, 2012. If it is not renewed, it can have serious tax implications for those attempting short sales or offering title to their homes to the mortgage company to avoid a foreclosure judgment in foreclosure law suits.
A mortgage company forgives debt on the promissory note by accepting less on the note than what is due in a short sale or by accepting title on the property in exchange for a satisfaction of the note. That forgiveness is normally considered income by the IRS and can be taxed. However, where the loan for the mortgage is to purchase the home and it is homestead, or if the loan is used to improve the family home, the Mortgage Tax Debt Relief Act currently allows that income to be deducted from income tax.
If the President and Congress don’t pass legislation extending that deduction, people can be taxed on money they never really had in their hands because it was used to buy a home when values were inflated but lost because the real estate market took such a serious dive in 2008. With the current political climate, there is serious question about whether it will be renewed. That hardly seems fair when the mortgage industry caused the crash and has been bailed out by the government and insurance programs under Fannie Mae and Freddie Mac.
If you currently have your home for sale and you owe more than the home is worth, you should talk to a CPA about what it will cost you if the home is not sold before the end of the year. We will be seeing many home sales over the next two months from those trying to take advantage of the tax relief.
If you are trying to get out of your home, are upside down on the mortgage and are in foreclosure, and you don’t have a contract on your home, you may want to consider a “deed in lieu” (title to the home given to the mortgage company as payoff of the note) as soon as possible to get the tax credit. Your CPA can answer this question best.