The Expiration of the Mortgage Forgiveness Debt Relief Act: a Ticking Tax Bomb
By Chris Boss, Esq.
Yesner & Boss, PL
The Mortgage Forgiveness Debt Relief Act of 2007 (the “MFDRA”) was rushed through Congress throughout the last four months of 2007. After its introduction to the House of Representatives on September 25, 2007, it was quickly pushed through the House and Senate and ready for the President’s signature before Christmas. According to the writers of the legislation, the MFDRA was pushed through Congress quickly because “the recent unrest in the housing market has prompted concern over the tax consequences associated with discharges of indebtedness in connection with restructuring acquisition indebtedness and home foreclosures.” In other words, canceled debt was treated as taxable income by the IRS in certain situations where financially unstable sellers could not meet the lofty expectations of the IRS. Unfortunately, the MFDRA exemption is expiring by the end of this year. This article hopes to inform homeowners under financial hardship in the Tampa Bay area of the changes they will face in 2013.
When to Apply the MFDRA Exemption
Not all sales of real estate involve the cancellation of debt. Generally speaking, there are two types of real estate sales: voluntary sales and involuntary sales. In a voluntary sale, a 1099-S form will be issued, declaring the proceeds from the real estate transaction. The 1099-S discloses to the IRS whether there was a net gain or a net loss on the sale. A 1099-S is required whenever the real estate is sold willingly by the homeowner. Moreover, a 1099-S is also required in short sales and deed-in-lieu of foreclosure sales.
Homes sold via a foreclosure sale are involuntary transactions; therefore, a 1099-S is not required by the IRS. Instead, a 1099-A is the requisite document, disclosing the acquisitions of secured property. Like the 1099-S, a 1099-A still reports a net gain or net loss on the sale.
Homeowners need to realize that homes short sold or sold under a deed-in-lieu requiring a 1099-S and homes sold requiring 1099-A forms most likely involve forgiven debt. If the Lender reports the cancellation of debt under a 1099-C, the IRS will view this as taxable income. This is where the MFDRA exemption comes in.
What is the MFDRA Exemption?
Although the MFDRA exemption for taxable canceled debt is not the only method to exclude or offset canceled debt as taxable income, it is definitely the least burdensome on sellers required to report under a 1099-C disclosure. Insolvency calculations, capital and operating losses and bankruptcy are additional methods utilized to either exclude or offset canceled debt.
The MFDRA allows taxpayers to exclude income from debt discharge on their principal residence involved in one of the previously mentioned eligible sales. The taxpayer may exclude up to $2 million of canceled debt as non-taxable income without having to pursue bankruptcy. For many people in the Bay area under financial hardship, the application of the MFDRA exemption has been crucial to their financial futures.
Homeowners in difficult financial situations that may be forced into foreclosure or looking to pursue a short sale or deed-in-lieu MUST ACT QUICKLY! This exemption will only be in effect through 11:59 on December 31, 2012. That allows eligible taxpayers to avoid a substantial amount of taxable income for less than six months. Please contact an experienced attorney at Yesner, Boss & Arrighi, P.L. today to see if you can take advantage of the last few months of the MFDRA exemption.
About the Author
Christopher W. Boss is co-owner and a managing member of Yesner & Boss, P.L., a law firm with offices in Tampa, St. Petersburg and Sarasota. Yesner & Boss offers the full range of practice, including personal injury, bankruptcies, litigation, business law, family law, wills, trusts and probate, residential and commercial real estate closings and foreclosure defense. Visit www.yesnerboss.com.