East Valley Real Estate Services, Az – United Brokers Group

by:  Chris Combs, Esq.

The Mortgage Forgiveness Debt Relief Act of 2007 (“2007 Act”) provides for an exemption for any income tax on debt forgiveness for money used to purchase, or make improvements to, a principal residence. This 2007Act is scheduled to expire January 1, 2013. If there is no extension of this 2007 Act, a seller will pay income tax on the amount of the debt forgiveness by a lender in a short sale. For example, if a homeowner with a $250,000 mortgage does a short sale for $150,000, the homeowner will have to pay income tax on the amount of the $100,000 debt forgiveness.

On March 19, 2012, Representative Charles Rangel (D-NY), the sponsor of the 2007 Act, introduced a new bill HR 4202, Mortgage Cancellation Relief Act of 2012 (“proposed 2012 Act”). This proposed 2012 Act is basically one sentence extending the January 1, 2013, expiration date of the 2007 Act for two years until January 1, 2015.

Seems simple, but politics are involved. See my email E-Blast dated 3/13/12 where I noted, among other things, that the current Speaker of the House, John Boehner, voted against the passage of the 2007 Act. Furthermore, although all of the other Democrats besides Rep. Rangel on the House Ways and Means Committee are co-sponsors of the proposed 2012 Act, none of the 22 Republicans on the House Ways and Means Committee agreed to be a co-sponsor. Therefore, the chances of passing the two-year extension are problematic. In fact, the website www.govtrack.us, which tracks the passage of Congressional legislation, states that “we think this bill has a 9% chance of passing Congress.”

If there is no passage of the proposed 2012 Act, or any other extension of the current debt forgiveness law, there will be a chilling effect on the recovering housing market. The number of short sales will be significantly reduced. Many “underwater” homeowners will continue to make their mortgage payments and hope that the value of their home eventually appreciates to the amount of their mortgage, rather than do a short sale and pay a significant tax bill.