The big question these days is whether the Mortgage Forgiveness Debt Relief Act of 2007 will be extended past December 31, 2012. Historically, the Internal Revenue Service (IRS) has treated forgiven debt as ordinary income, which of course is taxable. Generally, the Act allows the exclusion of income realized as a result of modification of the terms of a mortgage on one’s principal residence. In other words, if someone sells their principal residence via a short sale and the mortgage lender forgives the remaining debt, the borrower will not pay any income tax on that forgiven debt.
Originally the Act was only good through December 31, 2009, and then it was extended for three years. Right now, many short sale sellers are scrambling to ensure that their sale occurs before the end of 2012.
Several bills have been introduced in Congress to extend the Act for one or more years. Below is a summary of the bills:
– S.2250 Sponsored by Senator Debbie Stabenow [MI], it seeks to extend the tax forgiveness through 2014.
– H.R.4202 Sponsored by Congressman Charles B. Rangel [NY], it seeks to extend the tax forgiveness through 2014.
– H.R.4250 Sponsored by Congressman Daniel E. Lungren [CA], it seeks to extend the tax forgiveness through 2015.
– H.R.4336 Sponsored by Congressman Tom Reed [NY], it seeks to extend the tax forgiveness through 2013.
– H.R.4290 Sponsored by Congressman Jim McDermott [WA], in addition to establishing short sale timelines, it seeks to extend the tax forgiveness through 2015.
It is hard to predict if the tax forgiveness will be extended, and for how long. If someone is considering a short sale of their principal residence, they ought to initiate the listing right away if they have not done so already. Since it can take three to six months to conduct a short sale, it is important to start right now since time is of the essence.