Short Sellers motivated by ” IRS Tax Consequences” to close escrow by Dec. 31
The Mortgage Tax Relief Act …eliminating mortgage debt forgiveness expires Dec. 31, 2012.
Currently the tax-relief act allows homeowners to exclude from income (for the sake of tax purposes) primary mortgage debt (1st trust deed) forgiven by their lender.(i.e short sale, short refi , foreclosure or deed in lieu)
After Dec 31., if a lender cancels a home owner’s debt, the IRS requires the debt be treated (reported) as “general income”…because the duty to repay it no longer exists.
For example: if a homeowner owes $250,000 and the lender forgives $50,000 of that debt, that $50,000 is considered income.
If the homeowner’s combined federal and state marginal tax rate is 36%, the seller would owe $18,000 in taxes.
Note ….when a homeowner refinances their current mortgage to a LOWER loan balance, there is no tax on the difference between what a homeowner owes on the old loan and what a home owners owes on the new loan amount.( because the basis is higher)
However the refinanced loan amount is now a “recourse debt” which may subject the borrower to a future lawsuit for a “deficiency judgment”.
Here are a few of the other important rules the homeowner needs to know:
• The debt-relief law applies only to debt incurred to buy, build or improve a personal residence. (S ave your receipts in case of an audit).
It does not apply to a HELOC used to pay off debts or used as “walking around money”.
• The act does not apply to vacation homes or investment properties.
• The max. amount a homeowner can treat as indebtedness is $2 million, or $1 million if married but filing separately.
For more Information Please Contact
Nancy Cloward at 949-606-6116 or NancyCloward@me.com.
Heather Cloward at 949-228-4523 or HeatherCloward@me.com.