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No Replacement for the Mortgage Debt Relief Act yet. Now what?

Ask any real estate professional who handles short sales what is their most pressing concern, and chances are they will point to the fact that as of December 31, the Mortgage Debt Relief Act of 2007 is set to expire. As of today, there is no serious replacement or extension on the table. This has many agents greatly concerned about the future of short sales, with some speculating that it may be the end of the run. I disagree wholeheartedly, and here is why:

First, let’s recap what the Mortgage Debt Relief Act of 2007 does. The Act provides for protection for some sellers regarding the tax liabilities from the 1099-C received when a lender forgives their debt. In plain English, when a lender waives deficiency, that amount is “Forgiven” debt, and a 1099-C is issued. According to IRS rules, this forgiven debt is to be considered as “income,” and therefore subject to be taxed. While wholly unfair to the seller, since this is not actually income received, it is, nonetheless, law. The Act protected those who are selling  primary residences, and usually applies only to first liens, credit lines used for purchase money or home improvement. In other words, it was a major selling point in a seller’s consideration of how to address their selling situation, and one that made a short sale attractive over a Deed in Lieu or a foreclosure.

The Fear
Many agents fear that without the protection of the Act, short sales will cease to be an attractive option for homeowners, but I believe that this is unwarranted. The main reason for this is that, at least for me, about 40% of short sales do not qualify for the protection of the Act right now, and yet; sellers still feel that the benefits outweigh the risks. Further, new GSE (Fannie/Freddie/HUD) guidelines are making full deficiency waivers more of a certainty than in the past. Moreover, it is extremely rare that sellers not protected by the Act actually owe a tax liability. Let’s take a look at these three major points in depth:

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Protected vs. Unprotected Property
As of now, even with the Act in force, only primary residences are covered. This means that a large percentage of sales are not covered. There are certainly many sellers who are liquidating investment properties and second homes. The benefits afforded to these sellers are manifold, including:

• The chance for a full deficiency waiver
• Avoidance of a foreclosure on credit
• Psychological benefit: Taking action and selling vs. letting bank foreclose

Tax Liability vs. Deficiency
It is important for agents to understand this difference, because confusion of these terms is commonplace.

Deficiency: The difference between what the lender nets on sale versus what the borrower owes. This difference will be reflected on the 1099-C issued by the lender.

Tax Liability: This is the amount that may be considered forgiven debt, and therefore, income, based on current IRS rules. This is what is currently covered in some cases under the Mortgage Debt Relief Act.
In other words, Deficiency is what you owe the bank, and Tax liability is what you owe the IRS, and the two are not mutually exclusive.

New Guidelines
As of November 1, 2012, the major Government Servicing Entities (GSE’s) such as Fannie Mae, Freddie Mac, and HUD, have amended their guidelines to include a full deficiency waiver for most sellers. This is an important development, because the deficiency waiver preserves the most valuable benefit of a short sale for the sellers. The ability to complete a short sale and be virtually guaranteed a full release on the first lien is a major step in the direction of solidifying the short sales place in the market. In most cases, a full deficiency waiver means more to a seller than tax liability protection.

Tax Liability
This section is not intended to give legal advice, and I am not an attorney. It is my position on ALL short sales, that the seller has competent legal representation. I work very closely with attorneys in the short sale process, and here are the reasons why most attorneys and CPA’s will agree with my assessment on tax liability;

On a short sale not covered under the Act, the seller’s lender will issue a 1099-C-forgiveness of debt. This can be counteracted in several ways. The most popular are:

• IRS Form 982. This is the insolvency test. In many cases, regardless of income or assets, a sellers paper debt meets or exceed their assets. In such a case, the seller may be legally insolvent, thus exempting them from tax liability. In other words, all debts, including all mortgages (which are most likely underwater) count towards liabilities. This is especially helpful for sellers with more than one property. In all cases I have seen where sellers, even showing significant assets, Once they showed their liabilities via this form, the insolvency test was passed and they were not liable for taxes owed. To find out if your seller qualifies, always refer to a competent attorney or CPA.

• Loss on Sale. This is another way that a good CPA can offset tax liability. The 1099 income will be reported, but the loss on the sale should counteract this income. The loss will include the difference between selling price and purchase price, plus any down payment the seller put into the transaction.

While it is my personal belief that the Act will be extended or replaced sometime in 2013, the expiration of the Act is no cause for quitting short sales. In fact, the new GSE guidelines may make short sales even more attractive to sellers. To protect yourselves and your sellers, partner up with a good attorney and CPA and let them counsel your clients as to their tax options, and take that short sale listing!

Mortgage Debt relief Act Information:


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Joseph, that is just not true.  It is on the budget for next year to get extended through i believe 2014.  Just need Obama budget approval here. 

Below is a email to me directly from my Senator. I reached out to exprexx my concern for the looming expiration of the MFA.



Dear Justin:

Thank you for writing me to express your support for extending the mortgage debt relief provisions included in the Mortgage Forgiveness Debt Relief Act.  I appreciate hearing from you and welcome the opportunity to respond.

Please know that like you, I strongly believe the federal government must do more to help distressed homeowners and stabilize the housing market.  I supported the Mortgage Forgiveness Debt Relief Act (Public Law 110-142) when it was passed in 2007 because I believed that this tax relief would help the homeowners who had been most impacted by the housing market crash.  This legislation allows homeowners to exclude debt that is forgiven through mortgage restructuring or foreclosure from their taxable income.

As you discuss in your letter, this tax relief is currently scheduled to expire at the end of 2012.  I understand your concerns that the expiration of this tax relief will come at a time when many homeowners are still struggling with underwater mortgages or facing foreclosure.  You may be interested to know that President Obama included the extension of this tax treatment through 2015 as a part his FY2013 budget proposal.  Additionally, I have instructed my staff to carefully examine proposals to help struggling homeowners, including the extension of the Mortgage Debt Relief Act.  I appreciate hearing of your support for this proposal and will keep your thoughts in mind as I continue to work with my colleagues to stabilize the housing market and provide relief for homeowners impacted by the recession.

Once again, thank you for writing.  If you have any additional questions or concerns, please do not hesitate to contact my Washington, D.C. office at (202) 224-3841.  Best regards.

Sincerely yours,
  Dianne Feinstein          United States Senator

Further information about my position on issues of concern to California and the  nation are available at my website, Feinstein.senate.gov.  You can also  receive electronic e-mail updates by subscribing to my e-mail list. Click here to sign up.  And please visit my YouTube,Facebook and Twitterfor more ways to communicate with me.

That is interesting news but the problem is that the Senate has not voted on the budget in almost  4 years,....they would have to vote on it and pass it for the extension of the MFDRA. The President and Congress have all submitted budgets...many, many times, but the Senate will not vote on it and the last time they did vote (on president Obama's budget) it was rejected by a vote of 99-0!!

The post is VERY relevant, because until it is signed into law, we have nothing.  My message to for the agents to be able to understand what is happening, what can happen, and that it isn't the end of the world.

First off Joseph...your intent was to get our attention by stating something that was not true...lets put it this way...your title was not a Fact nor was the rest of your article...exaggerating is not the way to get our attention...also I have only had one short sale in two years that could not take advantage of the tax credit ...40% very doubtful...all I do is short sales and your statement is not a fact...your putting yourself at risk for liablility when you state untruths with nothing to back it up...anotherwards you have lost credibility from the Title of your article on....

Camille, if you do enough short sales, you will find that 30-40% are not delinquent, or are liquidating investment or non primary residences. Perhaps your sample of experience is not big enough.  How many short sales have you closed this year? (my bet is that there will be no response *crickets*)

This article did exactly as I intended it to do-spark thought and conversation about a VERY RELEVANT topic. There *IS* a lot of chatter about this and uncertainty as well. For those who went as far as to contact members of Congress, please note that just like closings, any bill or proposal that is up for review is like a closing: It's not done until it's signed into law (or funded)

I sincerely hope that it is extended, because it's the right thing for the American public, but until it is actually signed into law, there is a possibility that it will not go through.  Who knows, maybe it will get tossed out as a "gimme" in exchange for something else.  I do not know, and neither do you.

The point of my writing is that no matter if it is extended or not, short sales will go on, and there is still a benefit to the seller.

It was the perfect title to get peoples attention.  It worked.  It is definitely something extremely important for all to consider.  I am still optimistic it will get extended...  But I think the title was perfect and certainly truthful.  We need to PLAN on how we can do things just in case, as this is a BIG deal.

Send a message to your congressman about the issue.  You will receive an explanation back. The extension is happening for 2013 and 2014.  To put people in a fear position for no reason is very ~~~~ . 


Isnt it true that the tax liability is also an issue with foreclosure or deed in lieu of foreclosure?

so the short sale should continue to be more attractive even if the Mortgage dept relief act doesnt get extended. 

with a short sale, the amount of the deficiency (therefore the tax liability) should be less than with either of the other two options. 



Per the email I received from my congressman and our state senator it has been included in the proposed 2013/2014 budget.  The proposal says that it will continue through Dec 31 2015.  Hopefully all of us have participated in the call for action to have it extended.  I know I did.  All we can do now is cross our fingers and say our prayers that our government will do the right thing.  I'm sure they are well aware that a failure to extend the act will result in a blow our fragile economy cannot take.  We all know the government moves slow.  Its likely some of our clients that close in January may sweat it out for awhile waiting for the official word but I do believe it will be extended and that anything that closes during the interim will be included when the extension is finally voted into law.  There is no point in borrowing trouble.  Have faith Joseph! 


Macomb Michigan So What Happens If Mortgage Debt Relief Act of 2007 is Not Extended?

Rick Giese Macomb County Michigan's Short Sale Specialist and Default Advocate In today’s article we are going to take a look at if the Mortgage Debt Relief Act of 2007 is not extended past 12/31/2012.


With our FREE Help you can Avoid Foreclosure www.MIForeclosureHelp.com
With our FREE Help you can Avoid Foreclosure www.MIForeclosureHelp.com
PRLog (Press Release) - Nov 18, 2012 - 
Today’s article we are going to take a look at if the Mortgage Debt Relief Act of 2007 is not extended past 12/31/2012. We are going to take a look at one of the other options for avoiding paying tax on the forgiven amount on a Short Sale of your property. We are going to look at specifically at insolvency: what insolvency is, and how you can apply this clause of a short sale.

Here are some examples:

Example 1. Jessica is insolvent. She does not have to pay income tax on any of the forgiven debt:
Jessica owed $300,000 on her mortgage. She could not afford to keep making her mortgage payments, but her home was only valued at $210,000. Following the short sale, she paid her mortgage off for $180,000 (after closing costs). Her lender waived the $120,000 deficiency – this means that her forgiven debt was $120,000.
Jessica was worried that she would have to pay income tax on the $120,000 – but she looked up the insolvency clause.

Immediately before the debt was forgiven, Jessica owed:
Mortgage debt: $300,000
Car loan: $12,500
Credit cards: $8,000
Student loan: $32,000
TOTAL OWED: $352,500
Immediately before the debt was forgiven, the assets Jessica owned were:
Bank account: $600
Home value: $210,000
Car (fair market value): $15,000
Household goods, clothing, etc.: $5,000
At the time that the lender waived her deficiency, Jessica owed $352,500. Everything she owned was worth $230,600. This means that she was insolvent by $122,500.
Even the amount of the forgiven debt does not bring her back to solvency. This means that she does not have to pay income tax on any of the forgiven debt.

Example 2. Bryan is insolvent, but the amount of the forgiven debt brings him back up to solvency. He must pay income tax on part of the forgiven debt.
Bryan was self-employed and owed $450,000 on his mortgage. The economic downturn caused his business to slow down, and his son required medical treatment. He could not longer afford to make his mortgage payments. But his home was now worth only $350,000.
His lender approved a short sale, accepting $320,000 net proceeds and waiving the $130,000 deficiency balance. Bryan still had outstanding medical bills to pay, so he looked up the insolvency clause.

Immediately before the debt was forgiven, Bryan owed:
Mortgage debt: $450,000
Car loan: $25,000
Credit cards: $3,000
Business debts: $40,000
Outstanding medical bills: $60,000
TOTAL OWED: $578,000
Immediately before the debt was forgiven, the assets Bryan owned were:
Bank account: $2,000
Home value: $350,000
Car (fair market value): 40,000
Household goods, clothing, etc.: $40,000
Retirement savings: $45,000
At the time that the lender waived the deficiency, Bryan owed $578,000. Everything he owned was worth $477,000. This means that he was insolvent by $101,000.

Forgiven debt is considered by IRS to be like income. Bryan’s forgiven debt of $130,000 was greater than the amount of his insolvency – so it brings him back to solvency.

The forgiven debt is exempt from income tax up to the extent of the insolvency. This means that $101,000 of the $130,000 forgiven debt is exempt from income tax. The remaining $29,000 is taxable.
To find out whether you can use Insolvency to keep from paying income tax on your forgiven debt after a short sale, download the IRS’s Insolvency Worksheet.

To find out whether you can use Insolvency to keep from paying income tax on your forgiven debt after a short sale, download the IRS’s Insolvency Worksheet. (http://www.cdtaxandfinancial.com/docs/forms/Insolvency%20...)



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