A mortgage relief deadline is approaching
Published: June 11,2012
Everyone knows someone who has gone through it: a loan modification, a short sale or even a foreclosure. In today’s economy, major mortgage upheaval is not uncommon. Job losses, medical bills, adjustable interest rates and other hardships are causing many homeowners to weigh all their options with regard to what is generally their biggest asset (or liability, as the case may be): their home.
Among the many factors to consider is tax. From a tax standpoint, a forgiven loan is income. Before the real estate bubble burst in 2007, homeowners had to worry about taxes after dealing with the financial turmoil and heartbreak of a short sale or foreclosure. The tax bill was based on the amount of indebtedness that had been forgiven by the mortgage company or bank.
Fortunately, Congress enacted the Mortgage Forgiveness Debt Relief Act of 2007 (“the Act”) to help do away with this potential salt in the wound. While the act is by no means new, a quick refresher is now in order due to looming deadlines and potential ramifications.
The act, which affects debts discharged on or after January 1, 2007 and before January 1, 2013, generally allows taxpayers to exclude up to $2 million per married couple of mortgage debt forgiveness on their principal residence. In other words, under the exclusion, the taxpayers’ gross income would not include any discharge of qualified principal residence debt by the bank or mortgage company.
Qualified principal residence debt includes debt that was used for acquisition, construction or substantial home improvements. If homeowners obtained a second mortgage, home equity loan, or home equity line of credit to finance items unrelated to their residence such as vacations, cars, or paying off credit cards or other consumer debt, then that debt does not qualify and will not be excluded as taxable income.
It is important to recognize that the act relates to forgiveness of federal taxes. While some states do not adopt and conform to the federal Internal Revenue Code (the “IRC”), Idaho is a state that has adopted and conforms to the IRC, including the act. Consequently, the taxpayers’ gross income for Idaho state income tax purposes also excludes any discharge of qualified principal residence debt.
As with many things, timing is everything. The act is set to expire at the end of 2012. Election-year politics and a contentious congressional session could doom renewal of the debt relief the act provides. So, homeowners who are being pushed to the edge but who may not quite be there yet may want to take the plunge and begin the loan modification or short sale process sooner rather than later.
In many cases, the process is long and drawn out and typically out of the control of the homeowners. For example, a buyer may walk if the short sale process is too lengthy, causing the homeowners to start again at square one. Or the modification process may simply take much longer than anyone expects. Those who wait to initiate the process may be in for a nasty surprise if the sale or modification is not complete until after December 31, 2012.
Anna Eberlin is an attorney with the law firm Meuleman Mollerup LLP, practicing in the areas of construction law and real property acquisition, development, finance and leasing. Ms. Eberlin had five years of real estate management and investment experience prior to joining Meuleman Mollerup. Ms. Eberlin can be reached at 208.342.6066 or by email at email@example.com. More information at www.lawidaho.com.