Christmas came early to Washington D.C. this past year. The Congress was busy again trying to pass a huge budget bill. Politicians were all packing in their favorite items into that new budget bill and it was passed by Congress right before Christmas; signed by the President, and has now become law. Great news for all of us in the real estate industry!!!
For many who read our updates, this will appear like a reenactment of everything that had occurred the year before last, right at that same time, in 2014 before Christmas. In 2014, at the time before Christmas, 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 most of 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, had advised clients to not expect any further extensions. So here we are again back in Congress, at the end of last year, right before Christmas with a big budget bill and a tax package contained within it that prompted action.
As part of the overall budget bill, a group of tax benefit items came 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 back on January 1, 2015, but extending all the way through !!!
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 2016.
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. This tax law allows homeowners, who have lived in their property as a primary residence two out of the last five years, in most instances, to be able to avoid any forgiveness of debt tax that would be payable except for this exemption. It is not as simple as this brief explanation. Our attorneys always go over this statute in detail with clients in our 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 New Year!
Today's blog courtesy of Ed McFerran, McFerran and Burns Law