Mortgage Debt Cancellation Relief Extended Until December 31, 2013
Homeowners facing a foreclosure, a short sale or reduced loan principal by their lender after December 31, 2012, faced owing taxes on any mortgage debt that was forgiven by the mortgage lien holder. Home owners had rushed to complete short sales or debt reduction before the end of the 2013 because it looked like the fiscal cliff tax issues wouldn't be worked out in Washington.
Missing the deadline would cause these homeowners to owe taxes on any mortgage debt that was forgiven. According to Realtor.org in the state of Florida, short sales have sold on average for about $103,000 less than what the homeowner owed. The tax bill on would have been substantial on these homeowners if the law didn't exist.
Thankfully the tax relief that was enacted back in 2007 to help the housing market recover was extended but only for another year until the end of 2013. If you ask me the mortgage debt cancellation tax relief should have been permanently extended, unfortunately that wasn't the case.
Extending this tax law was the right thing to do, homeowners that are in a position of losing their home through a foreclosure or short sale are hardly in a position to pay federal taxes on mortgage debt relief which can end up being thousands or tens of thousands of dollars depending on how much debt is forgiven.
For example, let's say a homeowner owes $100,000 more on a loan than the home sells for in a short sale. Let's also say the homeowner is in the 25 percent federal income tax bracket. The former homeowner owes $25,000 in taxes, now if anyone has $25,000 laying around do you think they wouldn't be able to hold onto their home?
Not to mention the $100,000 debt is considered income by the tax code so the homeowner would probably owe more because it additional income would put this person or couple in a higher federal tax bracket.
Talk about adding insult to injury, first you lose your home and then you owe the IRS a ton of money is insane. Thankfully I have never owned the IRS money but if you have to work out some kind of payment plan the penalty and interest can end up being costing you thousands of dollars more. I know some people that spend years and years paying off the IRS, it doesn't seem to ever end.
If you're looking buy a home and are on the buying side of a foreclosure or short sale you can buy a home for considerably less then the market price. In fact even if you don't by a home in distress home prices are very affordable these days. Low home prices combined with low mortgage rates today now is the best time to buy a home in a generation.
In fact, current mortgage rates on fixed 30 year home loans averaged 3.34 percent in Freddie Mac's Primary Mortgage Market Survey this week. You can find home loan lenders quoting fixed 30 year mortgage rates below 3.00 percent if you have a credit score of over 700 and are willing to pay points on the loan.
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