In 2007, Congress passed the Mortgage Debt Forgiveness Act to combat against the housing bubble recession. The Act single handedly made the short sale, loan modifications and deed in lieu of foreclosure viable loss mitigation techniques for millions of homeowners. Under the terms of the Act, any forgiven debt from short sale, loan modification, deed in lieu of foreclosure, etc. is tax free. Traditionally, any waiver of debt is treated as income by the IRS and is a taxable event. However, under the Act, forgiven debt from loss mitigation options was exempt from taxation. In turn, millions of homeowners were able to successfully pursue short sales and other forms of loss mitigation to get out from under their underwater homes without additional tax consequences.
While the Mortgage Debt Forgiveness Act assisted helped millions of Americans, it self-terminated on December 31, 2013. Since the sunset of the Act, the system has reverted to taxing any forgiven debt under short sales, loan modifications, foreclosures, etc. The law now taxes those who have lost their homes and are already in tight financial positions. While there are other possible solutions to avoiding taxation on forgiven debt, the termination of the law has discouraged many from pursuing short sales.
However, is appears that good news may be on the horizon as Congress revisits the Mortgage Debt Forgiveness Act. Current legislation in the United States Senate proposes extending the Act for an additional two years. Furthermore, the bill proposes making the law retroactive to extend coverage those who have completed a short sale, loan modification or deed in lieu in the first few months of 2014. Before the celebration begins, it is important to note that the bill must pass through the House of Representatives where critics of the bill believe the legislation is no longer needed because the housing market has recovered. Other critics of the bill are more interested in revamping the entire tax code to provide Americans uniform tax breaks rather than through piecemeal legislation.
While the ultimate destiny of the Mortgage Debt Forgiveness Act is unknown, it does appear that the tax break will reappear in some form. If you are underwater on your home or facing foreclosure, call the experienced real estate attorneys are DeWitt Law Firm to discuss your options. Please do not sit back and do nothing because what you may not know about the foreclosure process could cost you more than just your home. Don’t delay, call today.