Most Important Year End Tax Preparation for Short Sellers!
They Forgive My Debt, They Forgive It Not…
By Deborah A. Lord, Esq.
Many people think that once they have successfully ‘run the gauntlet’ of the short sale process, that nothing else needs to be considered – the necessary documents were submitted, the short sale was negotiated, the bank agreed to forgive or reduce the remainder of their home loan, the home was sold, the closing was completed and the Buyer took responsibility for the house. Case closed…
…Well, not so fast. What many people (understandably) fail to consider are the potential tax ramifications to the forgiveness of such a substantial debt. However, in recent years, that’s where the Mortgage Forgiveness Debt Relief Act has stepped in. Since 2007, the Mortgage Forgiveness Debt Relief Act, as passed under the Bush administration, has offered relief to homeowners who would have otherwise owed taxes on any mortgage debt forgiven, like the debt forgiven for short sales or loan modifications. While this law was originally intended as a temporary solution, its benefits and presumed positive impact on the economy have been extended by Congress but only through 12-31-13.
Yet as we near 2015, with those short selling their primary residences in 2014 now holding their collective breath, the time for watching and waiting has nearly run out! Kenneth R. Harney of the Los Angeles Times writes, “If the Senate and House do not pass an extension of the mortgage debt relief law during the lame-duck session, the full principal balance that a lender wrote off on mortgage probably will be treated as ordinary income for 2014.” So in essence, what could occur, in the absence of an extension at the very least, is additional taxation on those who are already suffering from financial difficulty, who have already had to go through the short sale or loan modification process, for this supposed “phantom income.” Apparently, the federal government equates debt forgiveness to winning a small lottery. To them, no more home loan debt must surely mean there are funds aplenty for paying taxes!
This curious logic has few vocal advocates in Congress but neither is there a significant voice speaking up for the extension of this consumer protection law. The Financial Services Roundtable, and several other financial trade associations, sent a joint letter this month to congressional leadership calling for a two-year extension of the Mortgage Forgiveness Debt Relief Act. The National Association of Realtors has likewise approached the power players in Washington asking for extension. And while some progress has been made, many legislators have forgotten who keeps them in office (the voters) and have allowed partisan politics to dictate their respective courses of conduct, rather than doing what is best for their constituents. Prior to the November 2014 elections, there was an understandable defensive posture taken by some legislators not want to appear as contributors to the National Debt or otherwise exposing any vulnerability to their opponents. Since the election, the pro-tax-relief advocates still have not gained traction.
So what can be done? What can we do to tell Washington that the financially distressed shouldn’t have their limited finances even more depleted by crippling taxation? This first step – reach out to those who represent you in Congress! By clicking “HERE”, you will be able to access contact information for your legislators, both in the House and the Senate. If history has taught us anything, it is that sometimes our government just needs to be told, in no uncertain terms, about what is right and what is wrong, even while it may seem so simple to us all. Whether or not you yourself have ‘run the gauntlet’ of a short sale or loan modification, please let your voice be heard and tell Washington it is wrong to tax a person who is trying to rebuild his or her life post-financial difficulty. Allow them to have their “American Dream.”