At 2:00 am on New Years day, the Senate approved an agreement (American Taxpayer Relief Act of 2012) to avert the tax hikes and
The main concern we are focusing on here is the Mortgage Forgiveness Debt Relief Act and Debt Cancellation which is included in section 202. Prior to this act in 2007 if you short sold or even worse got foreclosed on, the debt (or loss) the bank took was 1099’ed to you and you were required to pay taxes on that debt. For example, if a seller owed $400,000 on their home, but market value was only $300,000 and you completed a short sale, the $100,000 flowed to the seller as income and taxes were to be paid against the $100,000. The Mortgage Forgiveness Debt Relief Act and Debt Cancellation act of 2007 allowed that debt to be forgiven.
That law that forgave the debt expired on December 31st 2012, many of our clients here in Santa Clarita who are in the process of a short sale on their home have been very concerned about this expiration. If the government did not extend the law, then many of the upside-down homeowners would be adding insult to injury to an already unfortunate situation by having to pay taxes on the debt on they incurred in the short sale of their home.
They have extended this law now for the rest of the year. Here is a letter that was sent out by the president of C.A.R (California Association of Realtors)
Late last night, Congress reached a settlement in the “fiscal cliff” negotiations. As a result, the Mortgage Forgiveness Debt Relief Act has been extended for another year. The measure will continue to exempt from taxation mortgage debt that is forgiven when homeowners and their mortgage lenders negotiate a short sale, loan modification (including any principal reduction) or foreclosure. REALTORS® should tell their clients to keep their short sales on the market and encourage them to consult with their own tax advisers about their tax situation.
I want to thank the 26,296 California REALTORS® who sent messages to their members of Congress and made 1,862 calls in response to our Call-for-Action.
The settlement also will allow capital gains rates to rise from 15 percent to 20 percent for high-income earners. However, capital gains rates on the sale of principal residences will remain unchanged and continues to exclude the first $250,000 for single taxpayers and $500,000 for married couples.
I will continue to keep you updated with more detailed analysis as it becomes available.
Happy New Year to you all!
CALIFORNIA ASSOCIATION OF REALTORS®
We are not completely finished with this process just yet though. For a bill to become law it must be passed by both houses of Congress, so when the Senate passes a bill, the same bill must also go to the House of Representatives, or if the House has passed a similar bill, the two bills must be reconciled by a joint committee to produce a single bill that both houses can pass. Then when both houses have passed the same bill, the bill goes to the President for his signature. The President may or may not sign the bill, and if he doesn’t, Congress can over-ride the veto if they have enough votes. Otherwise the bill dies. ( HR Passed by House and president is expected to sign it shortly)
What does this mean if you are still considering selling your home here in Santa Clarita as a potential short sale?
As of today there are only 219 active homes for sale in Santa Clarita. 35 of these homes for sale are “Short Sales” which is only 16%. This is significantly lower than in the last few years, meaning short sales are dwindling down and by the time we get to the end of the year, there may not be enough of them for congress to extend this debt relief act past the new expiration of December 31st 2013. The short sale process can still take 3-6 months (some shorter, nut some still longer) so if selling your home in a short sale is a possible option for you, waiting too late could be detrimental. In the example above that homeowner would be on the hook for taxes on an extra $100,000 of income. For any questions regarding the debt forgivenss actor or ano other tax related issues, it is always best you seek a CPA or other expert in the field.
If you or someone you know may need to sell their home to avoid the taxes associated with this debt please contact us for a free consultation :[gravityform id=”13″ name=”Short Sale Consultation”]