As of December 31, 2012, the Mortgage Debt Relief Act of 2007 expires and substantial tax consequences will apply if your main home is foreclosed or sold for less than what you owe. Therefore, it is imperative to analyze your current mortgage situation and make some tough financial decisions before this tax break expires.
The Mortgage Debt Relief Act of 2007 was enacted on December 20, 2007. The Act allows for the exclusion of income realized by the sale or foreclosure of your principal residence for less than the mortgage owed by the homeowner.
Normally debt that is forgiven or cancelled by a lender must be included as income on your tax return and is taxable income. However, the Act allows you to exclude certain cancelled debt on your principal residence from income. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure qualifies for the relief.
The Act applies only to forgiven or cancelled debt used to buy, build, or substantially improve your principal residence or to refinance debt incurred for those purposes. In addition, the debt must be secured by the home. This is known as qualified principal indebtedness. The maximum amount you can treat as qualified principal residence indebtedness is $2 million or $1 million if married filing separately.
The Act does apply to debt used to refinance your home to the extent that the principal balance of the old mortgage, immediately before refinancing, would have qualified.
Therefore, if you are behind on your mortgage and considering a short-sale or foreclosure, you better act fast. After December 31, 2012, any mortgage debt forgiven will be taxable as income on your return. Consider this example:
You own your home and the current balance of your mortgage is $200,000. You sell your home for $150,000.
Before December 31, 2012
The income of $50,000 will be forgiven and you will not be taxed on it because of the Mortgage Debt Relief Act of 2007.
After December 31, 2012
The income of $50,000 is taxable and included in adjusted gross income. This additional income would increase your tax liability significantly.
If you are in a situation where you are considering either foreclosure or short-sale, you must act quickly to close this on or before the end of the year. The difference could be well over $10,000 in tax savings.
For free consultation on your short sale options, please contact Patrick Murray, Realtor, Home Real Estate in Denver, Former Bank Asset Manager for REOs and Short Sales, at (303) 881-1333, PMBRKR@aol.com, www.selldenver.net.
Patrick’s preferred CPA is Chris Russo, MBA, Innovative Accounting Solutions, Inc., at (303) 475-1807, www.iaccountingdenver.com.
Let us help you out before the year ends ! !