Phew! This is good news!
The Mortgage Forgiveness Debt Relief Act, originally set to expire at the end of 2012 has been extended and will last until Jan. 1, 2014.
Since 2007, this law has given homeowners an exemption on federal taxes when they obtain debt forgiveness on their primary home. For example, a homeowner with a short sale for $100,000 less than their outstanding mortgage (loan or combined loans) would otherwise have to pay taxes on that difference as if it were income. It also applies when lenders forgive a portion of mortgage principal without the home changing hands.
Without the extension of this “tax forgiveness”, homeowners would have to choose between owing the bank for a property that is not worth what they owe on it, or owing the IRS and federal government for the debt they were forgiven. While there would still be a benefit to pursuing a short sale, if you are severely upside on your property (deep in negative equity), the psychological impact of knowing that even after going through the short sale process you would still end up owing someone money would prevent homeowners from seeing a short sale as a viable option to avoid foreclosure.
This extension is crucial as short sales tend to be more beneficial all around vs. a foreclosure:
- A short sale has less of a negative impact on the home owners credit.
- Short sales usually sell closer to market value than foreclosures thereby helping to maintain housing values (as opposed to foreclosures which can bring home values down)