It’s been on the TV and the radio for weeks. That dreaded term “Fiscal Cliff” has been popping up over and over. Now that we aren’t going to fall off of it, one particularly good thing has come of all this chatter we’ve been listening to.
The law that gives home sellers tax relief on forgiven mortgage debt has been extended through 2013 as part of the “fiscal cliff” deal reached last week. The debt relief act, scheduled to expire at the end of 2012, offers forgiveness of mortgage debt from being counted as taxable income by the Internal Revenue Service. What this basically means, is that when a struggling homeowner sells his home for $75,000 and he owes $150,000, he is not taxed on the $75,000 that the bank had to write off. This is good news for homeowners that are trying to make their way in these uncertain economic times.
Mortgage debt that’s been forgiven by lenders in short sales or loan workouts is usually taxable, which means that money comes out of borrowers’ already pinched wallets. Then in 2007, when the Mortgage Forgiveness Debt Relief Act was created, it gave people a break from taxable income on loan balances of up to $2 million, or $1 million for a married tax filer who’s submitting a separate return.
These types of deals increased in 2012 because of a national mortgage deal that forced banks to offer consumers housing relief. The measure will continue to exempt from taxation mortgage debt that is forgiven when homeowners and their mortgage lenders negotiate a short sale, loan modification (including any principal reduction) or foreclosure. The settlement also will allow capital gains rates to rise from 15 percent to 20 percent for high-income earners. However, capital gains rates on the sale of principal residences will remain unchanged and continues to exclude the first $250,000 for single taxpayers and $500,000 for married couples.
The law, set to expire at the start of 2013, was among the individual tax breaks saved in the fiscal-cliff deal. We as Realtors, have kept a close watch on its future because a good percentage of home resales are short sales, deals in which homeowners sell their properties for less than they’re worth if their lender approves it. We are advising our clients to keep their short sales on the market and are encouraging them to consult with their own tax advisers about their tax situation.
Had this law expired, it would have decreased the county’s already low housing inventory. Without this tax benefit, fewer homeowners would have tried to do short sales, which would mean fewer homes entering an already tight market. The expiration of the mortgage-debt relief act could have led to serious economic issues including an increase in bankruptcies and foreclosures because certain already strained borrowers would have been stuck with a tax bill after a short sale or loan modification.
This homeowner tax relief extension will help struggling homeowners take full advantage of the help offered through the national mortgage settlement and other foreclosure relief programs. This good news also likely means we will continue to see a slow but steady recovery in the housing market. Here’s to forgiveness! Happy New Year!
If you or someone you know is facing foreclosure, I can help. Call 925-831-9615 or visit San Ramon homes for sale for free market evaluation.
Also request my free Homeowner Relief Program report that reveals your option and how you can save thousands in taxes.