Mortgage Debt Forgiveness Act Extended by Congress, Property Owners Catch Huge Tax Break

President Obama recently signed into law a bill that, among other things, extends the Mortgage Debt Forgiveness Act until 2017.

The Mortgage Debt Forgiveness Act, or the Mortgage Debt Relief Act, allows tax exemptions on short sales of property. A short sale is a sale of real estate in which the monetary return on the sale is lower than, or “short” of, the total debts caused by liens against the property. Since the lien holders usually know that the property owner is unlikely to be able to pay back the full amount of the lien, they can agree to release their lien and accept less money as repayment of the debt. In this way, the property owners are able to avoid a potentially costly foreclosure.

The important law granting debt forgiveness on short sales was set to expire at the end of 2015, prompting congressional lawmakers to include an extension in the 2016 federal appropriations and tax relief bill. The U.S. House of Representatives and the U.S. Senate overwhelmingly passed the legislation, which was subsequently signed into law by Obama.

As a result of the inclusion of the mortgage debt forgiveness law in the federal spending bill, property owners who made short sales last year will likely get a huge break when filing taxes this April. If lawmakers had allowed the Mortgage Debt Forgiveness Act to expire on Dec. 31, any short sales made in 2015 would have been counted as income and resulted in major tax liability for some property owners. RealtyTrac, a real estate information company, estimated that the taxes on the average short sale would likely exceed $22,000.

Importantly, this year’s version of the Mortgage Debt Forgiveness Act applies not just to short sales made in 2015 but also to any short sales that occur in 2016, which should mean significant tax breaks for homeowners filing taxes in 2017 as well.

For further information about the inclusion of the short sale tax break in the federal spending bill, check out the HousingWire.com article entitled, “Short Sale Tax Break on Verge of Being Extended Until 2017.”

Categories