Short sale? Foreclosure? You're on the 'fiscal cliff'
A provision that eliminates federal taxes on forgiven debt expires Dec. 31. State attorneys general are lobbying to extend the tax break.
The attorneys general of 41 states have joined housing industry advocates, members of Congress and U.S. Treasury officials seeking tax relief for a group that is going to fall hard off the "fiscal cliff" at the end of the year if Congress doesn’t act.
That would be those who have lost homes to foreclosure, done short sales or deeds in lieu of foreclosure or received mortgage modifications that included principal reductions.
Under U.S. tax law, forgiven debt is considered income and therefore is subject to federal income tax at regular rates. Normally, if you sell your home in a short sale or lose it to foreclosure, you could end up owing the IRS thousands of dollars. The same goes for those who received a principal reduction.
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Under the Mortgage Forgiveness Debt Relief Act of 2007, the federal government said that mortgage cancellation on a primary residence was not a taxable event, as long as the money was used to buy, build or improve the home. (If you took out a second mortgage to send your kids to college and the debt was later forgiven, you still may be on the hook for taxes.) The act applies to up to $2 million of forgiven debt.
But that provision expires Dec. 31. So far, although policy wonks say the provision will be extended, it has not been.
That means if you sold your home for $200,000 less than you owed, and the bank forgave the debt -- not an unusual scenario in areas where homes are expensive and values fell substantially -- you could owe $50,000 in federal taxes if you’re in the 25% tax bracket.
"If the act expires, you will be asking people to pay cash on an income they never received and with cash they don’t have," John DiBiase, communications director for the National Association of Realtors’ government affairs office, told The Palm Beach Post.
The attorneys general argued in their letter to Congress that requiring homeowners to pay taxes on forgiven mortgage debt would negate the benefits of the $25 billion settlement reached with the big banks, which encourages short sales and principal forgiveness.
"People are already suffering enough who go through default and foreclosure, and to suddenly give them a tax bill is incredibly cold-hearted," Anthony Sanders, a George Mason University real-estate finance professor, told The Palm Beach Post. "The government was a major contributor to the housing bubble and burst, so it’s only fair that it extend the act to help households that have been absolutely crushed by the market."
If the provision is not extended, those who lost their home to foreclosure may be able to avoid a big tax bill by showing they were indigent, using IRS standards, at the time the home was sold. But not everyone in that situation will meet the test. Bankruptcy is another option, but it brings its own set of problems.
What do you think? Should the act be extended? Do you think it will be?
this is to Grandmal.......I agree to a point of helping the families that truly need it but how do you know who those are as we have had our welfare and social systems basically fandalized because generation after generation of childrens childrens think our government owes them a living. And then we let the illligals have medical and food and who knows what else because we don't have the hootspah to send them back to their own country, all the while they are selling drugs, forming gangs, setting up theft groups that go from house to house for whatever they can find worth a dollar to steal. We don't have an america any longer it should be renamed "Payashugo" So now that the is hitting the fan and the fiscal cliff is looming for us all, how do we have the right to call on the Grace of God when we brought this upon ourselves.......IT NEEDS TO STOP NOW AND I SAY LETS TAKE THE PLUNGE OFF THE CLIFF AND START OVER WITH WHOEVER IS STANDING AT THE BOTTOM.
Sometimes I wish I wasn't so responsible cuz if I wasn't I would have a butt load of money right now.
I say they should pay their dues.
"Park Avenue: Money, Power and the American Dream" . Everyone should watch this. You mention politicians, and this will tell you all there is to know about our political system and the feigned compassion of all our leaders (and wanna be leaders), their take on your finances and what they are really all about
It is only by the grace of God that we all aren't in the same boat! Show some mercy and extend the law. You can't squeeze blood out of a turnip but some people seem to enjoy trying.