Las Vegas, NV
Tuesday, October 23, 2012
Regardless of which box you are checking in the upcoming election, you should be aware that the expiring Bush tax cuts, made famous by the recent presidential debates, include a provision that excludes mortgage debt relief from taxation up to a maximum of $2 million. If the Bush tax cuts are allowed to expire, the Mortgage Debt Relief Act will expire with them. This means that homeowners who have received reductions in their mortgage debt either via short sales or loan modifications will be required to pay income tax on the amount of principal that was forgiven. According to a recent article in The Chicago Tribune, this would amount to around $19,000 in taxes owed for the average middle class relief settlement.
There appears to be bi-partisan support in both houses for extending the mortgage debt relief portion of the Bush tax cuts for another several years, but without extending the rest of the cuts it seems unlikely that a bill supporting the extension of just the mortgage debt relief portion will even reach a vote prior to the November elections.
This is especially bad timing when you consider that the nation's five largest banks (Bank of America Corp., JPMorgan Chase & Co., Wells Fargo & Co., Citigroup Inc. and Ally Financial Inc.) have recently increased their offerings of principal reductions and other relief to homeowners as part of a $25 billion settlement with federal and state officials over foreclosure abuse allegations. If the Bush tax cuts, including the mortgage debt relief act, do expire then these principal reductions will be reported to the IRS and will appear on homeowners' tax returns as income.
Experts agree that while the housing market shows signs of stabilization, extending these tax cuts is vitally important to keeping the housing recovery on track. "Extending this tax relief is critically important," said Lynda Gledhill, a spokeswoman for California Attorney General Kamala Harris. Harris was a key player in the national mortgage settlement. "It is difficult to imagine strapped homeowners able to take advantage of these and other market-restoring programs if they have to pay federal income tax on the principal reduction or short sale as 'income,'" Gledhill said.
My personal opinion is that we will probably see Congress find a way to extend these tax cuts for another 6 months to a year, much as they extended the first time home buyer credit in 2010-2011. Regardless, one thing is certain. If you are even remotely considering selling your home via a short sale, now is the time to do it. If you are able to close before the end of the year, you know that you will be able to take advantage of the tax credit.
Las Vegas, NV