Did you know that if you do a short sale, foreclosure or settle a 2nd mortgage you can get out of the debt on your underwater home that you could still owe the IRS a lot of money?
While many states allow homeowners to get out of their houses without the threat of the bank coming after them for the money the bank lost, the IRS can still haunt you for lots of money in taxes. Whatever money the bank loses on your underwater house is looked upon by the IRS as a gift from the bank and requires you to pay income tax on it.
Currently there is a law in place that exempts most homeowners from this tax. However, this law exprires on December 31, 2012. The Mortgage Foregiveness Debt Relief Act began with the Bush administration and extended in the Obama administration via the Dodd-Frank bill. This makes it bi-partisan but needs to be extended. We have brought this to your attention in previous posts and to support the extension of this important bill. We are gettting some additional help.
Below is an article published by Housing Wire. Written by Megan Hopkins.
Four attorneys general are leading the fight to extend tax relief to homeowners who faced financial hardship such as a foreclosure and were granted mortgage debt forgiveness.
Attorneys General Catherine Cortez Masto of Nevada, Lisa Madigan of Illinois, Pam Bondi of Florida, George Jepsen of Connecticut and Martha Coakley of Massachusetts lead the national effort of 41 state attorneys general calling on Congress to extend the exclusion, in place since 2007. Various government agencies and industry trade groups began fighting for an extension as early as April.
If Congress does not answer, the tax relief efforts put in place by the Mortgage Debt Relief Act will expire on Dec. 31. This federal act essentially dismisses a distressed homeowner’s mortgage debt in the case of a foreclosure, short sale or loan modification.
With the recent push toward more principal reductions via the national settlement between state AGs and the nation's biggest mortgage servicers, hundreds of thousands could be impacted. The $20 bilion-plus settlement outlines consumer-relief mandates and servicing requirements for the nation's largest mortgage servicers.
“Failure to extend this tax relief would hurt the very families we set out to help in the national foreclosure settlement,” Illinois' Madigan said. “We need to do everything we can to encourage — not deter — struggling homeowners to seek help to stay in their homes.”
The AGs wrote a letter to the leaders of the U.S. House and Senate requesting an extension. The letter noted that if the $25 billion national settlement does expire, homeowners would face up to $1.3 billion in tax increases over two years, according to the Congressional Budget Office.
"Unless Congress acts, any debt relief to be provided in 2013 under the national mortgage settlement, as well as other mortgage debt relief programs, will likely be considered taxable income," said Masto.
Added Coakley, “This tax relief is critical for helping struggling homeowners stay in their homes as we work to repair the damage from the foreclosure crisis. We urge Congress to ensure families are not hit with an unexpected tax bill when seeking a loan modification.”
More than 4,000 homeowners had received mortgage debt relief for an average savings of $67,457 per homeowner in Coakley's state of Massachusetts since the settlement was signed earlier this year.
An extension is included in the Family and Business Tax Cut Certainty Act of 2012 (S. 3521), which recently passed out of the Senate Finance Committee with bipartisan support.