Orlando homeowners are in a panic to sell their homes before the end of the year when the Mortgage Tax Debt Relief Act of 2007 is set to expire.
There’s a chance that the Act could be extended but, if Congress fails to extend the Mortgage Forgiveness Debt Relief Act of 2007 before the end of the year, homeowners will have to start paying income taxes on the portion of their mortgage that is currently being forgiven in a foreclosure, short sale or principal reduction.
That would mean that a homeowner who sells a $150,000 home for $100,000 in a foreclosure, could be taxed by the IRS on the remaining $50,000. If you’re in the 25 per cent tax bracket that would mean paying $12,500 in taxes and similar taxes would apply to forgiven amounts in short sales and principal reductions.
Consequently, Orlando homeowners are rushing to short sell their homes before the end of the year. More than 50,000 homeowners face foreclosure each month so, should the tax breaks expire, a large number of mortgage borrowers would be affected.
Over the past three years, the number of short sales has tripled to about a half million per year. Under the terms of the foreclosure abuse settlement, about one million borrowers may have their mortgage debt lowered through principal reductions over the next couple of years. The cost of the settlement would be $25 billion.
It is speculated that, now that the election is over, there will be very little legislation moving forward before the end of the year. Plus, the cost of a one-year extension is estimated at $1.3 billion, which makes it a huge point of contention.
Others feel that Congress will act before the end of the year because both houses agree that the Mortgage Tax Debt Relief Act needs to be renewed and it’s only a matter of how quickly the process will move forward.
Some Orlando homeowners may have nothing to worry about, as not all borrowers with forgiven mortgage debt will have to pay extra taxes. Even if the Mortgage Forgiveness Debt Relief Act expires on December 31st, special circumstances could exempt them. Specifically, no taxes would be owed if a debt is discharged in a bankruptcy or in the case of a homeowner being insolvent, that is, they had more debt than assets at the time the debt was forgiven.
In addition, certain states treat foreclosures differently so that some borrowers are protected against paying the tax.
