IF CONGRESS does not extend the Mortgage Forgiveness Debt Relief Act of 2007 by the end of the year, homeowners will have to start paying income taxes on the portion of their mortgage that is forgiven in a foreclosure, short sale or principal reduction.
So if you owe $350,000 on your home and it sells for $200,000 in a foreclosure auction, the IRS could tax you on the remaining $100,000. For someone in the 25% tax bracket, that would mean paying $25,000 in taxes on the foreclosure. Similar taxes would apply for forgiven amounts in short sales and principal reductions. Currently folks that went thru a Short Sale or Foreclosures will receive a 1099C and have to file a 982 form to be relief of paying taxes on the bank losses.
“People trying to do short sales are freaked out about it. They’re telling me they’ll do whatever it takes to close by the end of the year.” These are just a few blogs that I am quoting that is quiet nerve wrecking since year end is a month or so away.
Should the tax break expire, a large number of mortgage borrowers could be affected. More than 50,000 homeowners go through foreclosure each month. Meanwhile, the number of short sales has tripled over the past three years to a rate of about half a million a year. And, under the terms of the $25 billion foreclosure abuse settlement, roughly one million borrowers may have their mortgage debt lowered through principal reductions over the next couple of years.
“If there ever was a no-brainer in housing policy, this would be it,” one analyst commented on homeowners who are struggling, this is their ticket out of a debt and they should all jump thru hoops to do it prior to the year end.
Some Analyst are skeptical the exemption will get extended. Now that the election is over, he thinks Congress will be heading into a stagnant stage, with very little legislation moving forward through the end of the year.
The estimated the cost of a one-year extension at $1.3 billion to the taxpayers, so you do the Math, does this administration have the funds?
Yet “Both parties, both houses of Congress agree it’s good policy and it needs to get done,” said Jamie Gregory, chief lobbyist for the National Association of Realtors, which supports an extension. “The hold up is the process. I’m confident it will get done. I just don’t know how.”
Another news about mortgage balance reduction is on the table but unfortunately not for Californians just yet.
More homeowners in the Carolinas and around the country are receiving help on their mortgages from Bank of America, Wells Fargo and three other large servicers as the banks accelerate the relief programs mandated by a national legal settlement.
About 4,400 North Carolina homeowners had seen some form of relief from this spring’s $25 billion mortgage servicing settlement through the end of September, including $13 million in first-lien mortgage principal forgiven, according to a progress report issued Monday. About 2,800 South Carolina homeowners had gotten help.
Nationwide, more than $2.5 billion in first mortgage debt had been forgiven — triple the amount the banks had forgiven in the first three months of the settlement.
After a relatively slow start, Bank of America made up more than half of the total relief through the end of the quarter, both in the state and nationwide as its large-scale principal reduction program got underway.
But the numbers have yet to be reviewed, and the bulk of relief continues to come from short sales and second-lien forgiveness – which are viewed less favorably under the terms of the settlement.
“The report we’ve received from the banks is encouraging,” settlement monitor Joseph Smith told the Observer. “It shows they’re making fairly rapid progress to granting their required consumer relief.”
The settlement, reached with 49 state attorneys general and a few federal agencies, resolved long-running investigations into shoddy mortgage practices at some of the nation’s largest banks. Among the primary targets of investigation were allegations of robo-signing, or bank employees signing hundreds of foreclosure documents without reading them.
The five banks were required to make $5 billion in cash payments to state and federal government agencies. The remaining $20 billion was to be made in direct relief to struggling homeowners. Bank of America has the largest burden of the five in the settlement, owing a collective $11.8 billion.
A little too late to help everyone but hopefully it will come close to home for us. So far I have not heard of anyone getting this relief from the major lenders but will keep you informed. Be careful with this because this might be an opportunity for scammers to use this as a tool to pick your pockets.
Thanks for the information on this from a reader we are glad to share and help homeowners educate themselves with the latest news and events happening in the mortgage industry.
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Please call Ken Go of 1st Innovative Finance Group for your home purchase or “Zero Cost” Refinancing needs also for advice on Short Sales. Please call Ken at (562)508-7048 or write to [email protected].