As 2014 moves forward, a very important piece of legislation hangs in limbo. As noted in my earlier post, “Keep Your CPA Close and your Congressman Closer“, the Mortgage Debt Forgiveness Act has expired as of December 31st, 2013. This means that someone that will experience a foreclosure or short sale in 2014 may have to pay income tax on the portion of debt that has been forgiven. Here is an example: Let’s say someone sells a home for $150,000, but owes $200,000 on their mortgage. If the seller cannot pay the $50,000 shortfall, the lender may “forgive” this $50,000 portion of the debt, and hence, the seller has completed a “short sale”. With the expiration of the Mortgage Debt Forgiveness Act, the IRS may now look at this $50,000 as taxable income. To say that this adds insult to injury to someone that has had to go through a short sale or foreclosure, is a huge understatement. The irony is that just about everyone agrees that this Act should be extended. Industry groups have been very vocal on this, & the extension has broad bipartisan support. It just simply has not happened yet. The extension may still be put into place, & it may be retroactive to the first of the year, but that remains to be seen. Here is my caveat: the tax laws that surround this are complicated, & everyone’s situation is unique. If you are looking at a possible foreclosure or short sale this year, consult with a qualified tax professional regarding this topic. Watch this space…as soon as there is an update, I will post the news!
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