There are many ways to answer the question: what happens when the mortgage forgiveness debt relief act expires. In this post we are going to cover what happens with respect to the taxes you owe on your property should you sell your home through a short sale.
In the past, before the Mortgage Forgiveness Debt Relief Act was implemented by the US government several years ago, if you paid your mortgage company less than what was owed on it and they released their lien they could issue you a 1099 (income statement). With receipt of the 1099, you would owe self employment income taxes on that money such that it would amount to somewhere around 30%. So if you owed your mortgage company $250K and you paid them $200K you would owe them 30% of $50 which would be around $15K.
For many people this would create some serious financial hardship. So, during this tough economic times, the US government passed the Mortgage Forgiveness Debt Relief Act which provides for many homeowners to have this income be forgiven as a form of income even though the mortgage company issues a 1099. This provision/protection for homeowners is expected to run out at the end of 2012.
If you have considered a short sale in the past you may want to reconsider your options if you see a short term need to sell your home within the next few years. This is especially the case if your real estate market is depressed enough that it is unlikely that your home’s value will rebound to a point where you can sell your home for more than what you owe on it.
If you have questions about your options you should talk to a real estate attorney who specializes in short sales and loan modifications. One such law firm is the Thomson Law Group and their Mortgage Mediation Group. They are located in Phoenix AZ and handle Arizona loan modification and short sale consultations from the perspective of protecting the homeowner from future deficiency actions from the departing mortgage company.
What this brings to mind is that if you are a homeowner thinking about a loan modification or short sale you need to know what your options are from a legal perspective. You will have different outcomes depending on which option you take: short sale, loan modification, bankruptcy or foreclosure. Don’t trust what a real estate agent says, or a mortgage loan officer. The only real advice there is to follow is an experienced real estate attorney.