Many of the members of the Financial Revival Group have been waiting for this extension to happen and know what it is about. As we have been discussing in our Member Emails and in our Monthly Members Only Meetings, we fully expected this extension to take place. We even expressed to you that we thought it would simply be an add-on to the fiscal cliff bill, which indeed it was.
It is official. The Mortgage Forgiveness Debt Relief Act has been extended through the end of 2013.
We still have more to do because we think this bill should have been extended for three years, not just one. However, with all of the lobbying that went on from many different groups, we don’t believe that further extensions of this bill will be an issue.
Now, for the benefit of our readers who are not members of the Financial Revival Group and don’t know what this act is about, here is a quick explanation.
If you owe a debt and that debt is forgiven, you have received a financial benefit from that transaction. When the creditor finally gives up or settles the debt for less than is owed and stops further action to collect the debt, they have officially taken a loss. The IRS says that since you actually received the money and didn’t fully pay it back, you received a “gift” from that creditor and that “gift” amount is taxable as normal income.
In the past, we saw this mostly with credit card companies and other uncollectable debts. If you settled a $20,000 credit card debt for $8,000 you and the IRS would receive a form 1099 for $12,000. (The IRS gets a copy to make sure you include with your next tax return) You would have to pay income tax on that $12,000. If you were in a 15% tax bracket, your tax bill the following year would increase by $1,800. Not a bad trade by most standards.
With the continuing housing collapse, we are seeing this same event in real estate but with much larger numbers. So to help out underwater homeowners, the Bush Administration passed the Mortgage Forgiveness Debt Relief Act in 2007 that says that if your bank suffers a loss on your house, in certain cases, you would be exempt from the tax. This law expired at the end of 2010 but was extended through the end of 2012 by the Obama Administration. Now the bill has been extended again through the end of 2013.
This law applies to you if:
- Your bank takes a loss on your house as a result of a foreclosure, deed in lieu of foreclosure, short sale, loan modification or principle reduction.
- The event is completed by the end of 2013. That means your foreclosure, short sale etc. has to be finalized by the end of the year.
- The property is your primary residence.
- The money forgiven was used to buy, build or substantially improve the property.
- The forgiven amount is less than $2 Million. Hey, movie stars and basketball players need a break too.
If you or someone you know wants to find out about every option you have available, you can start with a free 15 minute consultation with the Financial Revival Group. This free, no obligation phone call will help you get your immediate questions answered and put you on the right track based on your particular situation. Call us at 425-259-2600 to schedule your consultation or CLICK HERE to email us.