One of the more popular laws passed after the housing bust was the Mortgage Forgiveness Debt Relief Act of 2007. Before it was enacted, if a lender canceled or forgave all or a portion of a homeowner’s mortgage, the homeowner would have to pay income tax on the forgiven sum via an IRS Form 1099-C. With the law, though, homeowners with canceled debts are significantly less likely to pay income tax on forgiven debt: The first $2 million of a forgiven portion of a loan is not taxed so long as it’s for a mortgage on a home that has declined in value. Although, for married couples filing separately it’s only $1 million. The law was scheduled to end before 2010, but Congress extended it through 2012 when it passed the TARP legislation in 2008.
2012, however, is rapidly coming to an end, and people are watching whether the lame-duck Congress will extend the law or reenact by 2013. The stakes are much higher this year because back in February the federal government and 49 states entered into an agreement with five banks that hold many of the nation’s $700 billion of mortgages with negative equity. The agreement required the banks to provide $17 billion for principal reductions, which is obviously not nearly enough to cover the total, but it may benefit some underwater New York homeowners greatly.
If the law expires, the agreement will lose some of its force because homeowners who receive large principal reductions will have to declare them as income for tax purposes. Since the reduction doesn’t really improve homeowners’ capacity to pay their taxes, the Mortgage Forgiveness Debt Relief Act’s expiration will discourage them from negotiating principal reductions with their lenders.
As a result, a New Yorker with an underwater mortgage has a few options:
(1) Begin negotiating a principal reduction with the mortgagee
(2) Plan on short-selling the house and deal with the deficiency later (Chapter 7 bankruptcy is an option)
(3) Offer the deed to the home in lieu of foreclosure if the mortgage is close to default
(4) File bankruptcy sooner rather than later
There may be other options depending on a homeowner’s circumstances, but it’s important to address them now before the tax law changes.
For more questions about principal reductions, underwater mortgages, bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced fair debt collection practices act Bruce Weiner for a free initial consultation.
