Foreclosure Alternatives — Sunsetting laws
Homeowners facing mortgage distress or foreclosure http://www.celiadeifik.com/Commercial-Litigation/Foreclosure-Defense.shtml
need to be aware that three key federal laws which may be important to them will ‘sunset’ (expire) at the end of 2012. They are as follows:
Mortgage Tax Debt Forgiveness Relief Act, which exempts most homeowners from owing taxes on the debt forgiveness of a short sale, expire at the end of 2012. This means that if your short sale or Deed In Lieu closes after December 31, 2012, you will owe income taxes on the amount which the lender forgives in that transaction.
[Remember, forgiveness of the remaining indebtedness (the ‘deficiency’) in these transaction is NOT automatic. You must negotiate for it and carefully scrutinize the relevant paperwork].
This federal tax law only applies to forgiveness of mortgage debt on a ‘qualified principal residence,’ which for Floridians means your homestead property. (It may not apply to home equity loans in some situations, so check with your CPA). For more information, see http://www.irs.gov/individuals/article/0,,id=179414,00.html or see this article http://www.realtor.org/government_affairs/short_sales_hafa
After December 31, 2012, you will be responsible for taxes on the amount of such forgiven debt, because the IRS considers it income.
[Note that there may be other ways to have the forgiven debt excluded from your taxable income…either negotiating it as part of settlement of contested litigation or, in certain instances, an affidavit of insolvency filed with your tax return. Further, if you declare bankrutpcy, you may be discharged from the debt with no taxable impact].
2. Federal Loan Modification Programs. HAFA, HAMP HARP and related programs expire at the end of 2012. Go to the source to read about these programs: https://www.hmpadmin.com/portal/programs/hamp.jsp and http://www.makinghomeaffordable.gov/programs/lower-payments/Pages/pra.aspx
These programs have not had a good track record so far, but they may be worth exploring, depneding on your situation.
3. Bush Tax Cuts The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA). These contained what are referred to as the ‘Bush Tax Cuts.” The critical tax cut provisions sunset December 31, 2012, unless Congress acts to extend them. This will affect your income, and therefore your ability to maintain your property. http://en.wikipedia.org/wiki/Economic_Growth_and_Tax_Relief_Reconciliation_Act_of_2001#Sunset_Provision
Of these, I believe the first, waiving taxes on forgiveness of indebtedness is the most critical. If you are contemplating disposing of an underwater property or doing a work-out in a foreclosure, it might be wise to fast track those plans.
