Mortgage Debt Relief Act Expires, Foreclosures Expected

 Posted on January 21, 2014 in Mortgage

The housing crisis that began concurrently with the financial crisis of 2008 may be a distant memory for most Americans, but according to Forbes there are many families still holding underwater mortgages, who are still dealing with it every day. “The number of homeowners who owe more on their mortgage than their home is worth is greater than the number of residents in most states,” Forbes reports. Zillow produced the latest statistics, reported at the end of December. “Nearly 11 million homeowners have negative equity in their homes… the rate works out to about one in five homeowners with a mortgage,” according to Forbes.

In 2007, the Mortgage Debt Relief Act was passed, which allowed taxpayers to exclude income resultant from the forgiveness of debt. “Debt reduced through mortgage restructuring as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief,” according to the IRS. Yet on December 31, 2013, this provision expired, essentially meaning that all forgiven debt in association with foreclosure or an underwater mortgage is now taxable. This, of course, will make a serious impact for families facing foreclosure or underwater mortgages in 2014.

At the end of last year, there were three bills in Congress that would have extended the Act, according to Forbes. These did not pass. “From a revenue perspective, one argument against extending the Act is that it depresses revenues by exempting otherwise taxable income from collections,” Forbes reports. Yet for the 11 million homeowners facing foreclosure because of an underwater mortgage, the expiration of the Act is essentially a new tax burden.

According to ShortSaleSolution.com, previously the Mortgage Debt Relief Act was especially important in short sales. An example of how the Act would have worked, according to ShortSaleSolution.com is this: “You owe $400k on your mortgage. Your home is worth $300k in today's market. When you complete a short sale, you will receive a 1099 from your bank for approximately $100k of forgiveness income.” Last year, a homeowner would not have had to pay taxes on that $100,000. This year she will.

If you or someone you know has questions about the Mortgage Debt Relief Act, underwater mortgages, or foreclosure in Illinois, contact an attorney from Newland & Newland, LLP today.