Mortgage Forgiveness Debt Relief Act of 2007
JUST as beleaguered borrowers are beginning to feel some relief from a $25 billion deal requiring the nation’s biggest banks to forgive more mortgage debt, another financial threat looms.
Borrowers will have to count mortgage relief from lenders as income on their federal tax returns. That means, for example, a borrower would have to pay taxes on a $100,000 reduction in principal owed on a loan, or a $20,000 write-off in the amount owed after a short sale.
An extension of the tax exemption — established under the Mortgage Forgiveness Debt Relief Act of 2007 — is a strong possibility. But given that Congress will have to grapple with serious fiscal issues after the November elections, there is no guarantee the exemption will emerge from those negotiations intact.
“I’m optimistic in the sense that everyone agrees on the merits of the issue and that it’s good for the market,” said Jamie Gregory, the deputy chief lobbyist for the National Association of Realtors, which is pushing for the exemption’s renewal. “My only caution is the process.”
Goldie Sommer, a real estate lawyer in Fairfield, N.J., who specializes in short sales, says she, too, is hopeful that an extension will come through, but she is taking no chances. Her office staff is doing all it can to make it easier for lenders to sign off on short sales. That means submitting packages only when they include a signed contract and a good-faith deposit from the buyer.
Given that short sales handled by her office take, on average, two to three months to complete, deals being negotiated now are already bumping up against the Dec. 31 exemption cutoff. “We’re trying to push the short sales now as fast as we can,” Ms. Sommer said, “or our clients will get stuck with a big fat tax bill.”
The Debt Relief Act exemption applies only to canceled mortgage debt used to buy, build or improve a primary residence, not a second home. The maximum exemption is $2 million.
In 2011, the estimated tax savings to borrowers from the exemption was at least $1 billion, according to calculations by the Realtors association.
Reinstating the tax would undercut the effect of the settlement reached earlier this year in the federal government’s investigation into banks’ epic mishandling of foreclosure documents. Under the terms of the settlement, five of the biggest mortgage lenders must put some $17 billion toward debt relief that enables borrowers to stay in their homes. Smaller portions are reserved for short sales and refinancing.
Borrowers in New York and New Jersey would feel considerable pain if the tax exemption expired, because both states have a backlog of foreclosures, said Michael Litzner, the owner/broker of Century 21 American Homes, which has offices on Long Island. The foreclosure process in these states is longer than in any other, according to RealtyTrac. New York has the longest timeline — 1,072 days as of the third quarter, compared with the national average of 382 days.
“There’s a tremendous shadow inventory that’s still looming out there that needs to be mitigated,” Mr. Litzner said. Still, borrowers ought not rush into a short sale decision solely because of the tax issue, said Jason Milligan, the owner of Milligan Realty, in Norwalk, Conn. They should look into whether it applies to their situation, and consider their options.
“For example,” he said, “if you can get another year living in the house for free, then it’s not going to matter so much. And if you’re going bankrupt, you might as well keep shelter over your head as long as you can until they throw you out on the street.”
Mr. Litzner says ending the exemption would be a “huge blow” to the economy. Without it, he predicted, “people will walk away from properties; you take it off the table and people lose the incentive to settle.”
The Snyder Group Luxury Real Estate can provide you with more details on what is happening in the Las Vegas Real Estate Market. If your thinking about Selling or Buying.. We can give you professional advise for free. If you want to take advantage of the current real estate situation in Las Vegas market and wants to become a Short Sale Investor, Contact The Snyder Group Luxury Real Estate.
This was drafted from an article posted by Lisa Prevost and is published in www.nytimes.com To see the original article Click Here