Tuesday, January 15, 2013

Fiscal Cliff helps Underwater Home Owners

Courteay of Al Clark's Home Action Newsletter

Topic Summary: 
Five years ago, at the start of the housing crisis, Congress passed a law called the Mortgage Forgiveness Debt Relief Act.  The MFDRA would prevent homeowners from having to pay federal and state tax on the amount of any debt forgiveness provided.  ( see IRS Resource)
This provision was set to expire, as designed, on Dec. 31st.  It was extended for one more year. This means that homeowners who get underwater workouts this year will not be liable for paying taxes on the amount of forgiven dept.
 A few editions ago we covered the issue. Many readers chimed in with the new HomeActions MEMBER VOICE advocacy tool. In a few seconds homeowners got  guaranteed message delivery to their elected officials and were able to see what other readers thought. Click the image below and you can see how it worked. 
Several weeks ago, 43 state Attorneys General crafted a request letter (pdf) to Congress, asking that the extension be made. They said that if the relief was not extended, it  would hurt the $25 billion robo-signing settlement they negotiated with the largest mortgage companies, forcing the companies to offer homeowners principal reductions. The thought of IRS and State tax leans may make a homeowner cautious of the workouts that may be available.
How does the tax provision work? Without the tax measure, a homeowner who owes $400,000 on his mortgage and sells his house "short" for $300,000 would owe income taxes on the difference of $100,000, the amount that's forgiven. The $100,000 would have been considered regular income by the Internal Revenue Service and in many states. The reason being, many state tax income sources the same way as the IRS.  


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