MORTGAGE DEBT RELIEF ACT EXTENDED

January 4th, 2013 at 7:28 pm

As you all know, Congress and the President reached a “Fiscal Cliff” deal on January 1. As part of that deal, the Mortgage Debt Relief Act of 2007, which technically expired on December 31, 2012, was extended for one more year. As a result, and as has been the case since 2007, short sale sellers will not be taxed on the mortgage forgiveness they receive in their short sale. Remember that, before the passage of this bill, if a bank approved a short sale, and wrote off a portion of the seller’s debt, the IRS looked at that amount as income to the seller which was subject to tax. This law excludes that amount from income. Also, remember that in order to qualify for this exception, the subject loan must relate to the seller’s principal residence and the money from the loan must have been used to purchase, build or make substantial improvements to the property. In other words, a short sale on a vacation home will not qualify for tax forgiveness. Additionally, the write off of money owed from an equity line of credit, where the money was not used for construction to the home, will be taxed as income.

The other piece of the Fiscal Cliff deal that could affect our clients relates to the capital gains tax rate. Pursuant to the deal, the capital gains rate will remain at 15% for all households except those who earn over $450,000 for a family or $400,000 for a single taxpayer. In those cases, the capital gains rate will increase to 20%. However, the exclusion on the sale of a principal residence of up to $500,000 remains in effect, meaning that the only taxpayers affected by this change would be those above the $400/450,000 thresholds who sell their homes for a gain of over $500,000. According to NAR, that represents only a very small percentage of all taxpayers.

Please share this information with your clients as appropriate. Of course, we cannot give legal advice, so if they ask any detailed questions, refer them to an attorney.

As always, please feel free to contact us with any questions you may have.

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