THE FINE PRINT – December 2013 Issue
LOSS OF MORTGAGE DEBT
FORGIVENESS TAX RELIEF IMPENDING?
Question: I am a real estate broker and understand the federal Mortgage Forgiveness Debt Relief Act is set to expire on December 31, 2013. Any news about an extension?
Answer: Good question, and for those aware of the Act and
what has transpired over the past few years, likely a source of frustration.
The short answer is that no extension has passed. Given the congressional
adjournment, nothing will occur until 2014, and one will have to wait and see
if the Act is retroactively extended.
The Act enables a
qualifying homeowner who goes through a short sale, receives a principal
reduction loan modification, or executes a deed in lieu of foreclosure (and as
a result avoids having to pay off the loan in full), to avoid having to pay
income tax on the amount of debt forgiven (the deficiency). For more details on
the Act, see the following links to my previous writings on the Act:
What is a
homeowner to do? If there is a pending transaction which will result in a
taxable deficiency, attempt to close on or before December 31, 2013. If this is
not possible, then negotiate a delay of any closing until Congress reconvenes
and see if retroactive legislation is passed and becomes law (if a short sale,
condition closing on the Act being extended). For more details from the
National Association of Realtors, see: http://www.realtor.org/articles/nar-issue-update-mortgage-cancellation-tax-relief.
If the Act is not
extended, then before closing, a homeowner should review their situation
closely with a tax advisor as well as possibly a bankruptcy attorney, to
determine the best course of action. For example, if a homeowner files
bankruptcy and gets a discharge, any deficiency will not be taxable. The
reverse is not true. If the homeowner has a deficiency as a result of a
transaction, and then files bankruptcy, the taxable income associated with the
deficiency will be taxable.
An insolvency
exclusion may be available to avoid the immediate taxation of the deficiency,
but the rules are complicated, and again, a knowledgeable tax advisor should be
consulted before the transaction closes.
The key point,
real estate brokers, in your representation of the homeowner/seller, is to make
sure a closing does not occur in connection with a short sale transaction
unless and until the homeowner/seller fully understands the potential adverse
tax consequences.
Is there anything
you can do to help get the Act extended? YES! Contact your Senators and
Congressmen and urge them to pass legislation extending the Act, and
preferably, for more than just another one year term. For those
interested, the following is a discussion of the legislation which was
introduced in 2013 to extend the Act, and the involvement of our two senators
and five congressmen.
Three bills were
introduced, as follows:
H.R. 2788:
Mortgage Forgiveness Tax Relief Act
Introduced: Jul
23, 2013
Sponsor: Rep.
Joseph Heck [R-NV]
Status: Referred
to House Ways
Title: To prevent
homeowners from being forced to pay taxes on forgiven mortgage loan debt.
Purpose: extend
the Act for two years, through and including December 31, 2015.
Co-Sponsors: 3
H.R. 2994:
Mortgage Forgiveness Tax Relief Act of 2013
Introduced: Aug
02, 2013
Sponsor: Rep. Tom
Reed II [R.-NY]
Status: Referred
to House Ways
Title: To amend
the Internal Revenue Code of 1986 to extend for 1 year the exclusion from gross
income of discharges of qualified principal residence indebtedness.
Purpose: extend
the Act for one year, through and including December 31, 2014.
Co-Sponsors: 52,
including Representative Earl Blumenauer (D.- OR)
S.B. 1187:
Mortgage Forgiveness Tax Relief Act.
Introduced: Sen.
Debbie Stabenow (D-Mich)
Status: Referred
to Senate Finance Committee on June 19, 2013
Title: A bill to
prevent homeowners from being forced to pay taxes on forgiven mortgage loan debt.
Purpose: extend
the Act for two years, through and including December 31, 2015.
Co-Sponsors: 19,
including Senator Jeff Merkley (D - OR)
As of December
24, 2013, neither Senator Ron Wyden, nor Representatives Peter DeFazio, Greg
Walden, Suzanne Bonamici or Kurt Schrader have become co-sponsors of any of
these bills.
Ambrose Law Group LLC
200 Buddha Building
312 NW
Direct Dial: 503.467.7237
Direct Fax: 503.467.7238
drambrose@ambroselaw.com
Disclaimer: this column does not constitute the giving of legal advice, and your reading this column does not create an attorney/client relationship. You are encouraged to consult a lawyer or accountant should you have questions about how this information may be applicable to your particular situation.
