Home > Avid Law Center, Bankruptcy, Foreclosure, Loan Restructuring, Mortgage Scams > Debt Relief Window Closing Soon

Debt Relief Window Closing Soon

A tax relief provision enacted by Congress to help financially strapped homeowners will soon be expiring. The 2007 law allows taxpayers to exclude from income the amount of debt that is forgiven or canceled and will expire Dec. 31 of this year.

The Chicago Tribune explains:

Under the tax code, borrowed money need not be reported as income because you have an obligation to repay. But if the lender subsequently cancels what you owe, the IRS requires that you report that debt as income because the duty to repay it no longer exists.

For example, if you owe $250,000 and your lender forgives $50,000 of that debt in a $200,000 refinancing, that $50,000 is considered income. If your combined federal and state marginal tax rate is 36 percent, you would owe $18,000 in taxes.

However, under the Mortgage Forgiveness Debt Relief Act of 2007, taxpayers are allowed to exclude from income the discharge of debt on their principal residence — at least until 2013.

So when your lender agrees to a short sale, there is no tax on the difference between the selling price and the amount you owe. When your lender forecloses, there is no tax on the canceled debt. Even when you refinance at a lower loan balance, there is no tax on the difference between what you owed on the old loan and what you now owe on the new one.

However, with the upcoming expiration of the Act, all residential mortgage debt relief that takes place on or after Jan. 1, 2013, will once again be considered taxable income.

Since the average time it takes to process a foreclosure – from the first missed payment to the final foreclosure auction – is about 674 days, as reported by PS Applied Analytics, some experts are sayin the tax absolution window may already be closed for foreclosures.

Short sales and refinancing are also long, drawn-out processes that can take anywhere from two to ten months which means that if finding debt relief was on your list of resolutions, this is one to begin working on sooner, rather than later.

Consult an experienced real estate attorney to determine your best and quickest options for debt relief. We also suggest speaking with a tax professional who can help you determine how your debt relief will affect your taxes.

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