The Mortgage Forgiveness Debt Relief Act and Debt Cancellation
The Mortgage Forgiveness Debt Relief Act and Debt Cancellation helps homeowners who are doing a Short Sale by relieving their obligation to pay their mortgage and take a less severe hit on their credit. The Act will perform as such:
Example A; John and Jane Smith purchased a home for $500,000 in 2007. Fast forwarding to 2011 John and Jane Smith have fallen behind on payments due to a job loss and would like to sell their house in a short sale and avoid foreclosure. They are being proactive about their situation and in the process can also receive up to $3,000 through HAFA. In order to do a short sale they will be required to list the house with a REALTOR and sell the house at Fair Market Value. In this case fair market value should be around $275,000. This is considerably less than $500,000 they owe on the mortgage; subtracting this would give them a negative of $225,00 that the bank would have to accept in order to do the short sale.
Short Sales are a very common type of sales these days and most lenders will allow homeowners to do a short sale in order to avoid foreclosure.
With the $225,000 that the bank has agreed to forgive on the short sale the amount could become taxable income for the homeowners. At the end of the year all banks are issuing a 1099 -C for the amount that was forgiven in order for the short sale to take place.
The Mortgage Forgiveness Debt Relief Act and Debt Cancellation allows homeowners to not have to pay taxes against the forgiven debt. Imagine if you would have to pay the taxes on $225,000? It would be quite a substantial amount and is now forgiven in accordance with this act until Late December 2012. It is likely this act will get extended as a result of the vast numbers or foreclosures still to come. It’s always important to consult your tax advisor or accountant to see if these acts apply to you.
There are many great reasons why to do a short sale, below are just a few reasons why and where to go to find out more information:
- No Deficiency (Bank cannot come after you for debt owed)
- Much lighter hit on credit than a foreclosure
- Cash for short sales, homeowners can receive up to $3,000 to do a short sale
- Buy a home again usually within 2 years after short sale
To download the Full Handout from the IRS on The Mortgage Forgiveness Debt Relief Act and Debt Cancellation click the button below
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