Homeowner tax break expiration means more debt, short sales

Darci Marchese, wtop.com

WASHINGTON – There’s nothing easy about losing your home to a short sale or foreclosure. For the past few years, people suffering a major blow at least got a big tax break. That may soon come to an end.

The Mortgage Debt Forgiveness Act of 2007 allows an income tax exemption for a homeowner whose mortgage debt is partly or entirely forgiven by a bank.

It’s set to expire Dec. 31, 2012.

Matt Alegi, a partner with the Potomac law firm Shulman Rogers and chair of the firm’s residential real estate practice group, says the tax break has meant a savings in the tens of thousands of dollars for individuals.

Typically, if someone were to have $150,000 forgiven by the bank, Alegi says, “you just made another $150,000 of income for tax purposes in that year.”

So, say someone makes $50,000 but had $150,000 forgiven by the bank. That person is now paying taxes on a $200,000 income, and included in a much higher tax bracket.

The loss of the relief will plunge homeowners further into debt, Alegi says.

He also thinks the expiration of the Debt Forgiveness Act will have an impact on short sales themselves. Area homeowners could try to push the short sale through this year to take advantage of the tax break.

Alegi believes there will be strong lobbying to extend the tax break. If it isn’t extended, the appeal of a short sale could greatly diminish for the homeowner.

To take advantage of the Debt Relief Act, you need to fall under very specific guidelines outlined by the IRS.

For example, the debt forgiven is only for primary residences and the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence.

Alegi says homeowners who spent the forgiven money on education or other bills do not qualify.

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(Copyright 2012 by WTOP. All Rights Reserved.)


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