Important Information: Many Borrowers are in Danger of Receiving a Large Tax Bill for Forgiven Mortgage Debt after This Year
Many of our clients at Charles P Castellon PA at some stage of foreclosure or mortgage distress may receive the benefit of having the lender forgive a portion of their mortgage debt. For example, if a borrower sells the property through a short sale, the lender will file a 1099-C debt cancellation form with the IRS to declare a loss for the difference between the value of the property and the amount the lender is owed on the mortgage.
Until the Mortgage Debt Relief Act was passed at the start of the foreclosure crisis in 2007, the IRS considered such cancelled debt taxable income, with some limited exceptions. This law protects primary homeowners from being taxed on forgiven debt under most circumstances and has been a great relief to millions of borrowers suffering through our historic housing collapse and global economic catastrophe.
Now, the law is scheduled to expire at the end of 2012. This means that many homeowners who may receive the benefit of debt forgiveness through a short sale or other means after this year will likely suffer a large tax liability. Though there is proposed legislation pending in the House of Representatives to extend the law beyond this year, our Congress has not yet taken action with only six months remaining in 2012. This means, among other things, that homeowners considering a short sale as a foreclosure alternative will be pressured into closing the deal before year’s end to get this important tax relief.
There are various outcomes that may result in mortgage debt forgiveness and the issuance of a 1099-C form. These include a short sale, completed judicial foreclosure or loan modification with a principal reduction (though rare, it’s been known to happen). If you or someone you know may be at risk to receive a large tax bill, don’t wait until it’s too late to act. Call the law firm of Charles P Castellon PA for strategic planning and advice and urge your representatives in Congress to pass the proposed extension.