2014 Foreclosure or Short Sale? Keep your CPA Close and your Congressman Closer

by Tony Abate · December 6, 2013

In 2007, the Mortgage Debt Forgiveness Act was passed. Prior to this, the IRS viewed a cancelled or “forgiven” debt as taxable income. The 2007 Act gave relief to homeowners that experienced a foreclosure or short sale. As an example, if someone owes $200,000 on a home, but the home was sold via short sale for $150,000, then the $50,000 that went unpaid was considered “cancelled debt”. Prior to the Mortgage Debt Forgiveness Act, that homeowner would have had to treat that $50,000 as income when they completed their taxes! The Act permits, in most cases, for that “income” to no longer be taxable. The problem is that the Act is set to expire at the end of this year, and an extension has not yet been signed into law. For the record, the Act was also set to expire December 31st of last year, & Congress granted a one year extension on January 2nd on this year! Therefore, there is hope that an eleventh hour extension (or a retroactive extension) will become a reality. In the mean time, if you or someone you know may be facing such a hardship in the upcoming year, it is probably wise to begin conversations with a qualified tax adviser. Many circumstances can impact the outcome of this; the dollar amount of forgiven debt, the occupancy of the home, or if there was a bankruptcy involved. No need to send hate mail to the IRS, they are simply following the law. A friendly reminder to your congressman may be in order however! In the mean time, here is a quick read from the IRS regarding mortgage forgiveness: http://www.irs.gov/uac/Ten-Facts-for-Mortgage-Debt-Forgiveness