Mortgage Forgiveness Debt Relief Act of 2007 -

Mortgage Forgiveness Debt Relief Act of 2007 has been Extended

The mortgage debt relief act has officially been extended for another year. This is a law that exempts those who are in a foreclosure or short sale situation [primary residences only] from having to pay federal income taxes on the deficiency balance of their mortgage after the transaction is complete.

This law was passed back in 2007 right when the Florida real estate market crashed. The main purpose of the law was to allow people to complete the short sale on their home and not be taxed on the deficiency as if it were income. This is a huge incentive for homeowners that are upside down to short sale their home.

I know many people have been holding their breath as the ending of the Mortgage Forgiveness Debt Relief Act of 2007 would have signaled a harmful blow to the real estate industry. Well now they can breath a sigh of relief, the Mortgage Forgiveness Debt Relief Act is now set to expire on January 1, 2014 and only applies to only a primary residence. Most homeowners that were on the fence about doing a short sale on their home would have probably chosen to file for bankruptcy as opposed to working something out with the lender.

Here’s an example of exactly what this means; Let’s say that a struggling homeowner sells their home for $100,000 and they owe $175,000, they are not taxed on the $75,000 that the bank had to write off. This is great news for homeowners that are struggling. Prior to the Act, homeowners were taxed on the forgiven debt, known as debt discharge income. If this act wasn’t in place, even people that have lost their homes to foreclosure would be taxed on the deficiency balance between what the house owed and what it sold for.Unlike any other liens or judgments, I.R.S. liens will follow you for the rest of your life and if you try to avoid paying them off, the I.R.S. will garnish your wages.

Orlando Realtors are Thrilled that “the Act” was extended

For realtors like myself that specialize in doing Orlando short sales, this great news. It means that short sales are still going to be the best way to go for struggling homeowners who can no longer afford to pay their mortgage. I would imagine that BK attorneys were hoping that the act wouldn’t be extended so that more homeowners would have opted for filing bankruptcy as opposed to short sale. at the end of the day, it’s a win win for all parties involved in the transaction.

A deed in lieu/ foreclosure with a smile

By now just about everyone living in Orlando has heard of terms such as “short sale” , “deed in lieu”, loan modification, etc. It’s important to know exactly what the difference is between these terms are and what the implications are. For example; many homeowners believe that a deed in lieu is the same as doing a short sale. This couldn’t be further than the truth. A deed in lieu is simply put is a foreclosure with a smile on it’s face or a “voluntary foreclosure”.

An overlooked downside to a deed in lieu of foreclosure is the possible forgiveness of the deficiency balance. Under federal law, a creditor is required to file a 1099C whenever it forgives a loan balance greater than $600. This may create a tax liability for the former property owner because it is considered “income.” However, the Mortgage Forgiveness Debt Relief Act of 2007 provides tax relief for some loans forgiven in 2007 through 2012.

The key issue in a deed in lieu of foreclosure is whether the lender is willing to forgive the deficiency balance. Make sure to read the contract carefully to see how the deficiency balance issue is handled. If the document is unclear, take it to an experienced Orlando real estate attorney with experience in property law. An attorney’s time is not cheap, but will be a bargain compared to signing an agreement you do not understand and are surprised later to realize its implications.

Consider Doing an Orlando Short Sale Instead of a deed in lieu

I’ve had a countless number of Orlando homeowners over the years come into my office asking me to explain the difference between a deed in lieu and a short sale. By doing an Orlando short sale the lender agrees to accept less than the balance owed on the mortgage at sale. The deficiency balance may be forgiven and you also may qualify for a “Cash for Keys” program which means that by doing a short sale, your lender may give you a cash incentive [between 3- 30 thousand dollars] . On the other hand a deed in lieu of foreclosure is basically a voluntary foreclosure n which you sign the deed over to the lender and walk away. However, a foreclosure, unlike a deed in lieu of foreclosure, the ownership of the property is not transferred to the mortgage holder, and remains with the owner.

The lesson here is if you are considering either a deed in lieu of foreclosure or a short sale you must review the terms and conditions carefully and make certain you understand whether the deficiency balance is forgiven. This is why it’s absolutely crucial to consult with an Orlando Real Estate expertwhen making such an important decision.

Lenders prefer short sales over taking a property to foreclosure because they don’t want to own distressed properties. They would much rather see the owner sell the property and lose the deficiency balance than be forced to take the property through foreclosure, as foreclosure is a costly and time-consuming process.

Another reason to consider a Orlando short sale over a foreclosure is that Foreclosure auctions tend to bring significantly less money than a normal sale would bring. If the sale brings less than the amount owed on the loan, the remaining balance of the loan is called a deficiency balance. This means that you could end up with a deficiency judgment against you for the balance.

If you still have questions about Orlando short sales, come see us for a free consultation. We’ve been specializing in Florida short sales and our team of Certified Distressed Property Experts are up to date on the latest laws and regulations when it comes to Orlando real estate ensuring that our clients get the best options available to them.

Jenny Zamora, Lic. RE Broker, CDPE

Tag: Mortgage Forgiveness Debt Relief Act of 2007

Great News for Orlando Short Sales!