It was recently announced that the Mortgage Forgiveness Debt Relief Act was extended to December 31, which is great news for Arizona REALTORS® and our clients. The Mortgage Forgiveness Debt Relief Act relieves a homeowner of the debt owed when he or she chooses a short sale, a deed-in-lieu, or allows their home to foreclose. When debt is cancelled, the homeowner will receive a 1099-c for the debt. The Mortgage Forgiveness Debt Relief Act allows the amount of the 1099-c to be non-taxable if it is the homeowner’s primary residence.
Many struggling homeowners with underwater mortgages choose to short sell their homes to avoid foreclosure. Had the Mortgage Forgiveness Debt Relief Act not been extended the underwater portion of the mortgage would have become taxable income. If the homeowner was facing a good deal of taxable income, the homeowner would likely choose foreclosure and bankruptcy to avoid the taxable income.
What does the extension mean for underwater homeowners?
If a homeowner chooses to short sell their primary residence and the short sale is completed by the end of 2013, the debt cancelled is non-taxable. This is good news for homeowners because a short sale is still a good option to avoid foreclosure and help the homeowner into a better financial future.
Top 5 Reasons this is a win for REALTORS®
- Homeowners can choose to short sell as a foreclosure alternative.
- Homeowners choosing to short sell means less foreclosed homes.
- Less foreclosed homes means neighborhood values should stabilize or increase.
- Home values increasing means more income for REALTORS®.
- Home values’ increasing amplifies the number of homeowners that can now sell their home through a traditional sale.
The extension means many homeowners will continue to choose to short sell their homes instead of allowing their homes to go to foreclosure. This will continue the short sale listing niche for REALTORS®. I know many agents were concerned about this extension and had stopped marketing for short sale listings because of the uncertainty.
For more information, read the Mortgage Forgiveness Debt Relief Act of 2007 in full.