It’s Complicated for Some
Mortgage Forgiveness Debt Relief Act of 2007 will sunset Dec. 31. What is the Debt Relief Act? What does that mean?
Here is an example:
John Smith had his underwater Sarasota, Florida home for sale and closed the short sale deal with a deficiency left of $100,000. Since this was his primary residence his deficiency was waved and because of his tax bracket and because of the Mortgage Debt Relief Act the “ghost income” did not add to his tax liability.
So what does this mean that it is “sunsetting?” The Mortgage Forgiveness Debt Relief Act of 2007 will no longer be in effect after December 31, 2012. That means underwater homeowners that might be sitting it out till the bell rings and then place their property on for a short sale will incur a tax bill based on the amount of the deficiency and their tax bracket.
Realtors and tax accountant’s working with homeowners that are underwater are urging their clients to get their homes on the market now so they can sell before year’s end to avoid a big tax bill from the sale.
Lenders are required to send a seller a 1099-C to report the forgiven debt. The seller is required to report that amount on form 982 which is for the requested waiver of the “ghost income.” There are some limitations; the house must be the primary residence, the deficiency can not be over $2 Million for a couple and $1 Million if filing separately and married, it does not apply to second mortgages when the money was not used for the property.
Message to those sitting on the fence. Now is the time to get your house on the market if you need to do a short sale. You could avoid a huge tax consequence when all is said and done.