CONGRESS NEARING PASSAGE OF THE EXTENSION OF THE MORTGAGE FORGIVENESS TAX RELIEF ACT
Christmas is coming early to Washington D.C. this year. The Congress is again busy trying to again pass a budget. Politicians are all packing in their favorite items into that new budget bill and it appears its passage is inevitable and will become law soon.
For many who read our updates, this will appear like a reenactment of everything that occurred last year right at this time. Last year at this time, the Mortgage Forgiveness Tax Relief Act, that eliminated forgiveness of debt tax for most homeowners, had actually previously expired on December 31, 2013.
Most were surprised to see promises of its extension, but were disappointed when the extension ended on December 31, 2014, which was too little too late for most of our clients, as they had already made decisions based upon other criteria. It was frosting on the cake for many clients, but it was no help for the future as it expired about eight (8) days later on December 31, 2014. Back to ground zero. No longer did we have this favorable tax treatment going into 2015.
So we spent 2015, again in a quandary, not knowing if this favorable tax law for short sale sellers would be extended or not. Frankly, in many articles I wrote, I did not expect Congress to further extend this favorable tax benefit for short sellers. All of our attorneys, being conservative in our consultations, advised clients not to expect any further extensions. So here we are again back in Congress with a big budget bill and a tax package contained within those overall budget negotiations.
As part of the overall budget bill, a group of tax benefit items are pretty much coming in as part of the overall budget package. Some affect us positively in Washington State, such as extending the sales tax deduction, allowing a deduction for mortgage insurance premiums and, most importantly the extension of the Mortgage Forgiveness Tax Relief Act.
This positively affects those of you dealing with short sale sellers. It is a wonderful Congressional Christmas present of a further extension of the Mortgage Forgiveness Tax Relief Act, not only retroactively starting January 1, 2015, but extending to !!!!
This is wonderful news as it allows us another year in which we can give all our customers good, strong and current advice knowing that they can plan and not be hesitant as to whether they should sell or not. Planning opportunities now abound for us in 2015.
Tax considerations are an integral part of every consultation we have with our clients. This extension pretty dramatically changes our consultations as we have only had the insolvency exception available up to now to assist clients down this tax path.
WHAT EXACTLY IS THIS SPECIAL TAX EXCEPTION THAT IS BEING FORGIVEN?
This was a special exemption that originally came into existence in 2006/2007 and was extended literally until 2014. It allows homeowners, who have lived in their property as a primary residence two out of the last five years, to in most instances, be able to avoid any forgiveness of debt tax that would be payable except for the exemption. It is not as simple as that and we always go over this statute in detail with clients in consultations. There are exceptions.
The forgiveness of debt creates income subject to ordinary income tax that, in many instances, could create a tax cost of upwards of $30K or $40K or more for a short sale seller.
Happy Holidays! Happy Investing!
Today's blog courtesy of Ed McFerran, McFerran Law