Federal Tax Relief for Short Sales & Foreclosures signed by the President (H.R. 3648)

After reading my post “Taxing Short Sales and Foreclosures,” few homeowners in San Jose selling their homes as short sales viewed that as a sight of relief because most had either refinanced their homes or purchased their homes with no money down.

At the time I published that post, there were bills that had been introduced but nothing had passed yet. However, yesterday the “Mortgage Forgiveness Debt Relief Act of 2007 H.R. 3648” bill passed by both chambers of Congress and was signed by President Bush.

Before this bill, when a troubled borrower lived in a home worth less than the actual balance of the current mortgage(s) and the homeowner decided to do a short sale, deed the property back to the lender or simply wait for the lender to foreclose on the property, the lender ended up loosing tens of thousands and in some cases hundreds of thousands of dollars. Well, that is not the end of the story, typically the lender 1099c the borrower for the amount lost in the transaction which would generally leave the borrower with a huge tax bill.

The “Mortgage Forgiveness Debt Relief Act of 2007” bill, which was introduced back in September 25, will eliminate that tax bill but it may prove to be somewhat useless for some San Jose residents looking to short sale their homes or are loosing their homes to foreclosure.

Hopefully the bill will be a big help for many and not little help for few since it only applies to the taxation on debt forgiveness used for the purchase, construction or a refinanced loan used for substantial improvement of the home. It would not however, apply to home equity loans taken out by borrowers looking to “consolidate debt, pay for vacations, buy a car or to buy a boat” (which was and still is the motto of some mortgage companies) simply because the San Jose real estate market was in full force.

Also for those borrowers who thought investing in real estate was easy as portrayed by those “get rich quick with real estate” seminars, the “Mortgage Forgiveness Debt Relief Act” will not help them as the bill only applies to principal residences defined by Section 121 of the IRS code.

Some of the other changes to the tax code were:

It will only help those who did the short sale, deed-in-lieu or foreclosure on or after January 1, 2007 to December 31, 2009
It sets rules for determining the allowable amount of the exclusion for those who have debts that do not qualify and who are insolvent
It extends the deduction for PMI (private mortgage insurance) through the end of 2014 so long as the contract is entered into after 2006 and before 2015
Tax benefits for volunteer firefighters, emergency medical responders, and other changes that are not mentioned in this post

So far so good right? Well this “help” does not come free of charge. In order to offset the lost of revenues, the “Mortgage Forgiveness Debt Relief Act” and Uncle Sam will take aim to recoup that revenue from the wealthier taxpayers who used the loophole in the IRS code to shelter from $250,000 up to $500,000 of tax free money in the sale of their vacation homes and investments homes by briefly treating each of them as a principal residence.

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Disclaimer: If you require specific legal or tax advice, you should contact an attorney or a professional CPA. This information is intended to provide general information and it is not substitute for individual legal and tax advice.

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3 Responses to “Federal Tax Relief for Short Sales & Foreclosures signed by the President (H.R. 3648)”

Taxing Short Sales and Foreclosures : San Jose-Santa Clara County Real Estate UNCENSORED on September 12th, 2008 3:06 pm

[...] [UPDATE: Dec 20, 2007 Tax relief for short sales & foreclosures signed (Mortgage Forgiveness Debt Relief Act of 2007 H.R. 3648)] [...]
A Homeowner’s guide: Short Sales and preventing Foreclosure Pt4 (The ramifications) : San Jose-Santa Clara County Real Estate UNCENSORED on September 12th, 2008 3:19 pm

[...] [UPDATE Dec 20, 2007: Tax relief for short sales and foreclosures signed (Mortgage Forgiveness Debt Relief Act of 2007 H.R. 3648)] [...]
SB 1055 California State Tax Relief for Mortgage Debt Forgiven : San Jose-Santa Clara County Real Estate UNCENSORED on September 30th, 2008 12:45 pm

[...] to the Mortgage Forgiveness Debt Relief Act of 2007 (HR 3648), many homeowners who sold their properties as short sales or lost their homes in foreclosure [...]