Mortgage Forgiveness Debt Relief Act Extended – Good For Home Supply; Mixed Messages For Economy

  • January 2, 2013
  • devinlucas

As part of the so-called “fiscal cliff” negotiations, Congresses’ late night settlement included a one-year extension of the Mortgage Forgiveness Debt Relief Act. Essentially, this allows underwater borrowers (those who owe more on their mortgage than their home is currently worth) to “discharge” any tax liability for loss incurred from a short sale, foreclosure or loan modification.

While most housing experts agree this is good for the overall housing market and will help provide additional homes into the limited marketplace, the same sends mixed messages and seemingly benefits many who sought to profit during the housing boom who now find themselves upside-down on their investment. In any event, more homes available on the market is a good thing for buyers suffering from a lack of supply as this extension should enable more short sales to help bridge the gap (but doesn’t come close to filling it).

For example – if you currently owe $500,000.00 on your home, but sell it for the current value of $400,000.00 (via a short sale and agreement with your lender(s), in which any remaining debt is discharged… see other articles in this Blog about short sales), you would ordinarily owe taxes on that $100,000.00 of “debt forgiveness,” since you are essentially being given $100,000.00 by your lender(s) to walk away. (Same scenario for a foreclosure or debt forgiveness.) Under the now extended Mortgage Forgiveness Debt Relief Act, you will likely not owe any taxes on that $100,000.00.

This of course allows many underwater borrowers to safely seek out a short sale agreement with their lender(s) and walk away from their homes without any tax or financial liability for the loss. (Same with a foreclosure if its already gotten that far.) There are of course implications to your credit score for a short sale… but not as detrimental as a foreclosure.

As noted, this should help add some inventory to the currently tight housing market. But beware, as short sales can provide some buyers a good deal, but have many risks. See this article for more info on short sales.

Homeowners seeking a short sale agreement with their lender(s) should engage a well-qualified REALTOR® and concurrently seek tax and legal advice from other qualified professionals. Short sales are complex and ripe for unscrupulous behavior, so making sure the right professionals are involved is critical.

Buyers seeking a home, short sale or otherwise, should consult a local qualified REALTOR® in the local market they are seeking. All real estate is local and only a local REALTOR® knows the area best.


-Devin Lucas

Author Devin R. Lucas is a Real Estate Attorney, Broker and REALTOR®, specializing in Newport Beach, Costa Mesa and Orange County, serving individual, investor and small business interests in real estate.  Active with the Newport Beach Association of REALTORS® and Costa Mesa Chamber of Commerce, Devin R. Lucas Real Estate is an independent real estate brokerage and law practice located in Newport Beach, California.

Devin R. Lucas Real Estate
Real Estate Attorney | Real Estate Broker | REALTOR® | | BRE No. 01912302
949.478.1623 office | 888.667.6038 fax

2901 West Coast Highway Suite 200
Newport Beach | California | 92663-4023

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