Congress came through at the 25th hour by extending the Mortgage Forgiveness Debt Relief Act of 2007 through 2013. This extension positively impacts those that are in a foreclosure, short sale or are considering a deed in lieu.
The mortgage relief act extension
The act generally allows homeowners to exclude the income realized as a result of the cancellation of debt on their mortgage. Before the act went into effect, borrowers had to pay taxes on the amount of debt that was discharged as reported on form 1099-C. For instance, a $750,000 mortgage holder in the 35% tax bracket that could only sell their home for $500,000, would ordinarily owe $87,500 in taxes for the cancellation of debt. The only way that the borrower could have avoided the tax liability would have been to declare personal bankruptcy or to claim insolvency. Thanks to the Mortgage Relief Act, borrowers can exclude up to $2 million of forgiven debt and $1 million if married filing separately on their primary residences (second homes and investment properties still do not apply).
What is a deed in lieu of foreclosure?
For those that don’t know, a deed in lieu of foreclosure provides that the debtor give their home to the lender (i.e. the “deed”) in exchange for the lender canceling the loan. In return, the lender also promises to never initiate foreclosure proceedings and to terminate any existing proceedings. This agreement is effective with a legally signed document. Before a lender agrees to a deed in lieu, they will likely require that you at least put the home on the market for 90 days.
Do I qualify for a deed in lieu of foreclosure?
You cannot execute a deed in lieu of foreclosure if you have a second or third mortgage, a home equity loan, or tax liens against your property.
What are the benefits of a deed in lieu of foreclosure?
You do not have to go through the costly and time-consuming process of a foreclosure. While you’ll still have the debt relief listed on your credit report, it’s possible that the impact to your credit could be less detrimental than a foreclosure or short sale.
More tax questions? Ask your tax questions online.
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