Archive for the ‘foreclosure taxes’ Category

Congress Extends Mortgage Forgiveness Debt Relief Act

Wednesday, January 2nd, 2013

As expected, Congress has extended the Mortgage Forgiveness Debt Relief Act for one more year. This extension assures that homeowners who short sell their homes, obtain loan modifications or are subject to foreclosures, will not be liable for the taxation on mortgage debt that is forgiven by the lender(s).

Homeowners who currently have a short sale on the market, in escrow, or are considering listing their property as a short sale can breathe a sigh of relief and continue to pursue this path. However, as always, it is important to make sure to consult with your accountant, attorney, and a qualified short sale Realtor before pursuing a short sale or loan modification, in order to assure you are aware of all possible consequences and that it is the right option for you at this time.

The settlement reached by Congress also maintains the current capital gains rates on the sale of principal residences – the first $250,000 for single tax payers and $500,000 for married couples will be excluded.

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Another Way to Avoid Federal Taxation on Short Sales

Wednesday, May 30th, 2012

Are you thinking about short selling your home, but worry about possible tax consequences if it does not close by December 31 (the end of homeowner tax relief under the Mortgage Forgiveness Debt Relief Act)? You may be in luck, even if the Act is not extended.

The Mortgage Forgiveness Debt Relief Act (MFDRA), which prevents the federal government from taxing the difference between the sales price and amount owed on a mortgage in short sale and foreclosure situations, expires on December 31 of this year. Many agents are advising their clients to make decisions quickly if they are planning to short sale their homes, so that there is time enough for marketing and obtaining lender approval before the deadline – and since we are already at the halfway point in the year, time is ticking. But there is another way to protect yourself from the federal taxation even if the act expires and you want to short sale your home.

Little  known to many, the Internal Revenue Code, section 108, provides a “moment of insolvency” document that could save you from taxation should the act not be extended.

Section 108 has an “insolvency” exclusion, which allows you to avoid taxation if you can show you are insolvent. To figure out whether you qualify, you need to take your total liabilities immediately before the discharge of debt, minus the fair market value (this includes exempt assets like retirement accounts and pension plan interest) of your total assets before the discharge. The resulting number will give you the extent to which you are insolvent. This amount cannot be taxed federally.

It is important to note that many people who are short selling or foreclosed upon do not have assets to cover their responsibilities, thus the reason they are in this position. So if the MFDRA is repealed and you didn’t have time to short sale your home before, you may still be in luck. I highly advise you to consult with your CPA or tax professional to see if you are insolvent.


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