Mark it on your calendar. Without an extension, the 2007 Mortgage Foregiveness Debt Relief Act (MFDR) will expire at the end of this year. How could it have been almost five years since this important law was created to help address a portion of the housing crisis??
The MFDR was originally created by Congress to assist people who needed to sell their homes with an approved short sale. It also found value for foreclosed homeowners…in some very limited cases. Basically, owner occupants who had borrowed up to $2 million are able to exclude what otherwise would be a taxable event-the forgiveness of mortgage debt. So, a homeowner with a mortgage balance of $250,000, and an approved short sale for $175,000, had a bank forgiveness of $75,000. This gift was taxable and reported with a 1099-C tax form with a potential cost to a 25% tax bracket of $18,750. Up to the creation of the MFDR I had watched homeowners choose to file bankruptcy rather than be burdened with the tax debt as a bankruptcy provided a similar tax forgiveness-along with many years of credit problems. After the MFDR was created, the IRS essentially could not tax the homeowner for what is otherwise considered a gift, and the homeowner did not have to file bankruptcy to receive this protection.
What do you think the chances are that this very helpful law for continuing to create a positive environment for owner occupied short sales will be extended? I think that is anybodys guess based on election year politics. If you have been considering selling and have been on the fence, and a short sale is likely, start now to make a decision. Avoiding taxation on the amount forgiven by the lender is an important part of your future financial well-being.
