CANCELLATION OF MORTGAGE DEBT TAX–Tick Toc, Tick Toc

CANCELLATION OF MORTGAGE DEBT TAX–Tick Tic, Tick Toc

Did you know that if a creditor forgives any debt that you owe, the IRS tax code requires that creditor to issue a 1099 reporting the shortfall?  The tax code recognizes the shortfall as income, added to your other income and you must pay income taxes on the total dollar amount.

Unfortunately, those having trouble making their mortgage payments and facing foreclosure can expect their lenders to do exactly that, if the lender ends up selling the property at a foreclosure sale. They will also comply with the tax code if you sell your home in an approved short sale and the lender has to forgive any part of your loan commitment. This is not exactly good news for distressed homeowners. All they need is a huge tax bill after they have lost their home.

Fortunately, the government stepped in several years ago and enacted legislation that provides an exemption for those where their lender cancelled debt on their principal residence. Unfortunately, the Mortgage Debt Relief Act will expire on December 31, 2012. Although there is a possibility of an extension, we would not want to bet the ranch on that happening, given our current economic environment.

For those who plan to let their homes go through the final phases of a foreclosure, there is no way to control the timeline. Homeowners considering a deed in lieu may have a little more control of the timeline.

Those homeowners considering a short sale should start the process immediately. Although many of the loan servicers are making every attempt to speed up the short sale process for qualified borrowers, they are still taking many months to complete. If you started today, and your loan servicer is very slow, you may not get the final approval and be able to close before that December 31, 2012 deadline, looming in the background. It would be prudent to find and Realtor® experienced and trained in dealing with short sales, so that you can get started as soon as possible.

We have included a video made by Alex Charfen, CEO of the Certified Distressed Property Institute (CDPE) to help you understand the situation. Realtors® with the CDPE designation are trained to help distressed homeowners avoid foreclosure.

If you have any questions, of know of someone in need of assistance, please call us at (916) 337-0658. We are here to help.