Time is running out on a tax break that is aiding troubled homeowners from paying thousands of dollars to the IRS.
The Mortgage Forgiveness Debt Relief Act of 2007 will need to get extended by Congress by the end of this year or many homeowners will owe the IRS money. These homeowners would have to begin paying income taxes on the portion of their mortgage that was forgiven due to a short sale, foreclosure, or principal reductions. For example if a person owes $150,000 on their home and it sells for a $100.000 in a foreclosure situation, the IRS could tax them on the remaining $50,000. Someone in the 25% tax bracket would pay $12,500 on the foreclosure. Short sales and principal reductions would also have similar taxes.
Real estate agents have stated that many people selling their homes this year in distress sales are very anxious to get rid of their homes by the end of the year in case the Debt Relief act does not get extended.
If the tax break does not get extended a large number of homeowners could be affected. The number of distressed home sales is staggering. Each month more than 50,000 homeowners go through a foreclosure. Short sales have also tripled over the past three years to about a half a million a year. Due to these numbers many agree that the current Debt Relief Act is a “no-brainer!”
However, some experts are skeptical that the exemption will get extended. They believe now that the election is over and with the holidays coming up that Congress will have very little legislation going forward by the end of this year. Meanwhile others disagree and believe that Congress WILL extend the act by the end of the year.
“Both parties, both houses of Congress agree it’s good policy and it needs to get to done,” said Jamie Gregory, chief lobbyist for the National Association of Realtors, which supports the extension. “The hold up is the process. I’m confident it will get done. I just don’t know how.”
Even if the Congress allows the exemption to run out this does not mean that all borrowers with a forgiven mortgage debt will be subject to pay the IRS. For example, if the debt is discharged in a bankruptcy, no tax is due. Also certain borrowers are protected in some states, such as California.
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