The housing crisis isn't quite yet over for Illinois but help is in sight with the renewal of the Mortgage Debt Forgiveness Relief Act. Countless homeowners went through a short sale, foreclosure or mortgage loan modication in 2014, most without any idea as to what the tax consequences might be. If you are among those who lost their home or had to modify your mortgage last year, you are in luck. As a condition of short sales and loan modifications, lenders oftentimes agree to forgive the underlying debt. That means that they agree not to come after you on your original obligation. That's right. Remember, you signed a promissory note with the bank & they can hold you to it but may agree not to in short sales & loan mods. But, along with the good comes the bad. You are off the hook on the terms of your original mortgage obligation but the lenders are required to report the amount of forgiveness to the IRS and you pay tax on that amount. For example, let's say that you had to sell your house for less than what was needed in order to pay off your existing mortgage, and the bank agreed to eat the difference to the tune of $10,000. They approved your shortsale and agreed not to hold you liable for the $10,000 afterwards. Normally, you would pay tax on that $10,000. Ouch. The Mortgage Debt Forgiveness Relief Act was a temporary law put into place that prevented that shortfall from being taxable. On December 16, 2014, President Obama signed a bill that extended the Act and made it retroactive for 2014. If you went through a short sale or otherwise had mortgage debt forgiven last year, or debt was forgiven on a foreclosure, be sure to make your tax preparer aware of this so that it can be dealt with appropriately. As for 2015, Congress may decide to extend it out as part of a larger tax package but there are no guarantees.
If you have a contract to short sale your house or are behind on your mortgage and wondering if a bankruptcy may be the better way to go, give us a call and we can help you go over your options.