As of today, the Mortgage Forgiveness Debt Relief Act expires, as it was not renewed by Congress. This is a HUGE problem for underwater homeowners. Let me explain:
Underwater homeowners often try to negotiate with their bank so that
they can sell their homes for less than they owe in a short sale or have
their mortgage balance reduced. But the difference between what the
homeowner owes and the lower sales price approved by the bank is
considered income for the homeowner and subject to tax by the Internal Revenue Service.
For example, someone with a $100,000 mortgage who is allowed to sell
their house for $80,000 is supposed to pay taxes on the remaining
But the Mortgage Forgiveness Debt Relief Act saved such homeowners from the tax burden. Last year, Congress rushed to extend the law during negotiations about the fiscal cliff but only through the end of 2013.
They did not do so this year. This means that the IRS will consider a short sale to be INCOME, even though the homeowner took a loss in selling his home for less than what he paid for it.
So let’s say that you borrowed $240,000 for your home in 2007. The bank allows you to short sell it in 2014, and you get $100,000. That $140,000 difference will count as income, and if you are married and each earn around $45,000 a year, you are now considered subject to the taxes that the evil rich must pay. Your tax bill will be about $45,000 higher than it otherwise would.
Hope this doesn’t keep you up at night.