According to recent news stories, the Mortgage Forgiveness Debt Relief Act has been extended one year through the end of 2013.
Homeowners who are being forced into having to sell or leave their homes because of a foreclosure will be spared having to pay income taxes for up to $2 million of the value of their home ($1 million if married filing separately) for the mortgage forgiveness. Prior to the Mortgage Forgiveness Debt Relief Act of 2007, a homeowner would be responsible to pay the income taxes on any mortgage forgiveness deficiency.
The Great Recession of 2008 and a mortgage crisis throughout the United States has thrown many homeowners around the country into an upside down mortgage value of their homes. In addition, many homeowner’s financial circumstances changed so they could no longer make the mortgage payments on time. This has caused millions of homeowners to default on their loans and left hundreds of thousands of foreclosed homes on the market today.
When the mortgage companies begin to foreclose on the defaulted homes, they send out 1099-C IRS forms to the homeowners showing an income for the mortgage forgiveness of the deficiency owed. Since the homeowner has borrowed the money and is no longer responsible for the debt, the difference in what the home actually brings and what was originally owed has been perceived by the IRS as income. In times past, not only had homeowners received a whammy to their finances, they had received a double whammy through having to pay taxes on money they were not counting on as income in the beginning. The federal government offered relief to these homeowners in the Mortgage Forgiveness Debt Relief Act.
There are advantages for homeowners getting out of ownership responsibility if the home is going to be foreclosed. Using the Mortgage Forgiveness Debt Relief Act will help you avoid income taxes on the sell or foreclosure of your home. Here are several ways a homeowner can use the Mortgage Forgiveness Debt Relief Act to their advantage:
Short Sale. If you can get a bank to accept a short sale of your home, the advantage of a short sale is that you can avoid foreclosure, and until the end of 2013, you can also take advantage of the Mortgage Forgiveness Debt Relief Act by not having to pay income tax on the mortgage forgiveness deficiency that may also occur.
Deed in Lieu of. The key to this move is to get your mortgage company to take your deed in lieu of foreclosing. The advantage to this move is that you give the legal responsibility of the home ownership to your mortgage company who now holds the Deed to the property. Up until the Mortgage Forgiveness Debt Relief Act expires at the end of the year, you can also escape payment of taxes on the deficiency that may occur when the mortgage company sells the property.
Foreclosure. Most people don’t look at foreclosure as an advantage, but it can be under certain circumstances. If you have found your home is too far underwater and there is no way you can pay the mortgage off, it may be better to take a hit on your credit while taking advantage of the tax break offered by the Mortgage Forgiveness Debt Relief Act.
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