One of the major successes Congress reached in the "fiscal cliff" negotiations at the end of 2012 was the extension of the Mortgage Forgiveness Debt Relief Act for another year. The measure continued to exempt from taxation the mortgage debt that is forgiven when homeowners and their mortgage lenders negotiate a short sale, loan modification (including any principal reduction) or foreclosure. On December 31, 2013 the Mortgage Cancellation Tax Relief will expire. Without an extension, homeowners in the same position would be subject to federal income tax liability on debt written off by lenders as a result of these distressed transactions.
Since early this year the National Association of REALTORS® (NAR) has been working with Congress to extend this important real estate tax provision. NAR has aggressively sought co-sponsors for both Senate and House bills, S. 1187 the "Mortgage Forgiveness Tax Relief Act" and H.R.2994 "Mortgage Forgiveness Tax Relief Act of 2013." With the U.S. House of Representatives now adjourned, it is unlikely Congress will act before December 31 to extend the Mortgage Debt Forgiveness Act. However NAR is confident Congress will most likely address individual tax provisions retroactively in 2014.
As was the case with the previous extension, Congress is expected to retroactively apply Mortgage Cancellation relief to include transactions between January 1, 2014 and the enactment of the extension. In the meantime, NAR is asking REALTORS® to continue to express the importance of this issue to their legislators.
California's troubled homeowners who sell their homes in a short sale may not have to worry. Both the Internal Revenue Service and Franchise Tax Board recently clarified that underwater home sellers are not subject to state income tax liability for debt written off by lenders in short sales.
While debt relief had been extended at the federal level last year, the state exemption expired at the end of 2012. California REALTORS® tried to get state law to conform to the federal law by urging state legislators to pass the California Association of REALTORS®-sponsored Senate Bill 30 (Calderon, D-Montebello), but that measure stalled. Clarification by both the IRS and FTB now puts distressed homeowners at ease, according to C.A.R. 2014 President Kevin Brown.
"Distressed California homeowners can now avoid foreclosure or bankruptcy and can opt for a short sale instead, without incurring federal and state tax liability, even after the Mortgage Forgiveness Debt Relief Act of 2007 expires at the end of this year," said Brown.
"Not having Mortgage Debt Forgiveness Act extended causes uncertainty for homeowners. Homeowners shouldn't be forced to pay tax on money they've lost with cash they never received," adds Carolyn Miller, president of the Silicon Valley Association of REALTORS®.
Miller advises homeowners involved in a distressed transaction, such as short sale, to speak with a tax professional for advice on their particular situation.
The Silicon Valley Association of REALTORS® (SILVAR) is a professional trade organization representing over 4,000 REALTORS® and Affiliate members engaged in the real estate business on the Peninsula and in the South Bay. SILVAR promotes the highest ethical standards of real estate practice, serves as an advocate for homeownership and homeowners, and represents the interests of property owners in Silicon Valley.
The term "REALTOR®" is a registered collective membership mark which identifies a real estate professional who is a member of the National Association of REALTORS® and who subscribes to its strict Code of Ethics.
Variations of this article have appeared in local area newspapers.
For further information, please email or call the SILVAR office at (408) 200-0100.