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The expiration of the mortgage-debt relief act could have led to serious economic consequences for Southern California and other parts of the nation, said a local housing analyst.
The Mortgage Debt Relief Act Of 2007, a law that gives struggling mortgage borrowers tax relief on forgiven mortgage debt has been extended for the year 2013 as part of “fiscal cliff” legislation over the weekend.
Mortgage debt that’s been forgiven by lenders in short sales or loan modifications without this Act, is technically taxable; which means both a short sale/modification will hurt borrowers financially in the long-run to some degree. Enter 2007, when the Mortgage Forgiveness Debt Relief Act came into play, forgiving individuals from including the break as taxable income on loan balances of up to $2 million, or $1 million for a married tax filer who’s submitting a separate return.
Set to expire in 2013, this act and a handful of others were revived in the “Fiscal Cliff” legislation. The outcome was closely monitored by those in the Real Estate Industry since approximately 30% of home sales in Southern California are “short sales”, transactions in which homeowners engineer the sale of their property for less than the mortgage amount, with bank approval.
Loan modification and Short Sales surged in 2012 mainly because of a national mortgage settlement that forces banks to offer consumers housing relief. Roughly 60% of the assistance offered to California borrowers in the deal arrived in the form of short sales.
The expiration of the mortgage-debt relief act could have led to serious economic consequences for Southern California and other parts of the nation, said a local housing analyst. Possible outcomes included a significant rise in bankruptcies and foreclosures because the tax bill would de-incentivize borrowers considering a short sale.
The law’s expiration also could have slashed the county’s already lower-than-normal housing inventory, the respected analyst added. Without the tax benefit, fewer homeowners would have attempted to do short sales, which would mean fewer homes entering an already slimmed-down market.
As stated in a Wikipedia article: “However, after the signing of the Mortgage Forgiveness Act, amendments have been made to remove such tax liability and allow the borrower and lender to work freely together to find a common solution that is beneficial to both parties. This protection is limited to primary residences — rental properties are ineligible for relief — so consultation with a tax advisor is necessary to ensure that a borrower qualifies. The amount of forgiven mortgage debt allowed to be excluded from income tax is limited to $2 million per year.” Please visit the Mortgage Forgiveness Act “Fact Sheet” for more information at: http://georgewbush-whitehouse.archives.gov/news/releases/2007/12/20071220-6.html
The IRS.gov website states: “The debt must have been used to buy, build or substantially improve the taxpayer’s principal residence and must have been secured by that residence. Debt used to refinance qualifying debt is also eligible for the exclusion, but only up to the amount of the old mortgage principal, just before the refinancing.