Are you looking to short sell your home here in southern New Jersey? Are you working on a mortgage modification that seeks a reduction of principal? If so, you had better hurry, as you may end up paying more in taxes for 2013! Why? Because the Mortgage Forgiveness Debt Relief Act of 2007 is set to expire on December 31, 2012.
Why should you care?
Because this act waives any tax due on debt forgiveness that might arise from a principal reduction in a mortgage modification or write-off in a short sale. It also works to protect you in a foreclosure situation if the home is ultimately sold by the bank for less than what is owed.
For example, let's say you are trying to go to short sale on your home because it is "under water." You owe $175,000 to the bank, but the sale proposes payment on the mortgage of $125,000. That $50,000 difference, if forgiven by the mortgage company, is ordinarily considered income by the IRS and taxable! This debt relief act waives that tax!
Last month forty-one state attorney’s general urged Congress to extend the Mortgage Forgiveness Debt Act. A bill has been introduced by Senator Max Baucus of Montana but it currently has no co-sponsors. If nothing happens, 2013 could be a bleak year indeed.
What is the Alternative?
I have never been a fan of short sales, and mortgage modifications (especially those which involve a principal reduction) often do not go through. There are often other options available in bankruptcy, and insolvency makes the "debt forgiveness tax" inapplicable!
If you live in southern New Jersey and are considering filing bankruptcy, call my office at 856-432-4113 or contact me through this site for a free consultation to discuss your case.
If you are looking for more information about bankruptcy, then download my free book,Top Questions People Ask About Filing Bankruptcy in New Jersey.