Mortgage Debt Relief Act Expiration
What About the Tax Break for Short Sellers?
In a clear indication of where our market is today compared to where it has been over the last few years, there has been an eerie quietude regarding the expiration of the Mortgage Debt Relief Act. Indeed, neither NAR’s nor Florida REALTORS® sites are treating this as front page news.
With short sales comprising a much smaller portion of our market, this treatment is somewhat understandable. But you ought to be aware of what is happening in Congress and how it may affect your clients’ interest in short selling their property.
You will recall that the Mortgage Debt Relief Act of 2007 exempted from taxation certain types of cancelled debt. Ordinarily, cancelled debt is treated as income by the federal tax code. Under the Act someone who closed a short sale in 2013, for example, and whose lender cancelled the deficiency balance (i.e., the difference between the total owed and what the lender netted from the sale), might have been able to avoid having to pay income tax on that deficiency balance.
The Act was a boon to many who have successfully closed short sales or who have received principal reductions over the last handful of years; and the Act provided a much needed boost to the real estate industry by smoothing the way for more of those deals to close.
The Act officially expired yesterday, January 1, 2014, after which short sellers must carefully consider the tax implications of their potential cancelled debt. There are efforts afoot in Congress to extend the Act and to do so retroactively. According to a HousingWire.com article, “the extension has strong bipartisan support”, which is not surprising and which should breed some hope in the minds of distressed homeowners.
Unfortunately, though, there is no guarantee that the provision will be extended retroactively.
So what do we do in the meantime?
