Over the past few weeks, we have heard attorneys, title closer, realtors, and mortgage professionals claim the Mortgage Debt Relief Act, which had expired at the end of 2013, was extended. This is a half-truth. Yes, the Mortgage Debt Relief Act was extended, however, it was only extended retroactively for 2014.
The practical application of this change in the law is if a homeowner completed a short sale in 2014, and met the requirements under the Act, the debt forgiven by the lender is not taxable.
Unfortunately, the act has not been extended for 2015. As of now, homeowners who complete a short sale in 2015 will pay tax as income on the debt forgiven.
To refresh everyone on the requirements under the Mortgage Debt Relief Act; canceled debt may be excluded as taxable income if the debt is a qualified principal residence indebtedness. Qualified principal residence indebtedness is any mortgage you took out to buy, build, or substantially improve your principal residence. The debt must be secured by your principal residence. Qualified principal residence indebtedness also includes any debt secured by your principal residence used to refinance a mortgage you took out to buy, build, or substantially improve your principal residence, but only up to the amount of the old mortgage principal just before the refinancing.
If you have any questions about this article or anything real estate related, do not hesitate to contact us.