Mortgage Foreclosure Debt Forgiveness Act of 2007 - a tax break for struggling mortgage borrowers is set to expire in January 2014. This law was created to help distressed home owners and prevent them from defaulitng on their loan. Normally, debt forgiveness results in taxable income. But under the Mortgage Foreclosure Debt Forgiveness Act, the home owner can exclude up to $2M of debt forgiven on his/her principal residence.
According to National Association of Realtors (NAR) a return of the tax could have a BIG IMPACT on underwater home owners.
Once the law expires, a home owner who owns a $400,000 property and sells it for $250,000, the forgiven debt of $150,000 will be taxed after January 1 of 2014. The tax payable could reach up to $35,000. In addition to that, the debt that was forgiven from 2007 to 2013 must be included in the taxable income.
NAR president Gary Thomas firmly believes that extending the Mortgage Foreclosure Debt Forgiveness Act is detrimental to the continuous recovery of the housing market.
"If it's allowed to expire, many distressed homeowners may opt instead for continued default until foreclosure or simply to walk away from the property," said Thomas. "Either way, this would destabilize communities as foreclosed and vacant houses drive down values in the surrounding neighborhood." (Source: www.money.cnn.com)
There's a very slim chance that the government will extend the bill. With only approximately 2 weeks into the year and Christmas season at that. Our best bet is if the government extends the bill by next year and apply it retroactively.
If you have any more questions, please feel free to contact me.
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