The expiration of the Mortgage Forgiveness Debt Relief Act can be somewhat confusing.  In fact, if you asked 9 out of 10 homeowners, they may not even know what it is, much less how to explain the benefits of taking advantage of it, or consequences of not taking advantage of the opportunity.

Let’s start with the simplest explanation possible, then expand and explain further.

SIMPLE EXPLANATION: When you decide to sell your property, if you owe more than the house is worth, you will need to complete a short sale.  Your lender will report the difference between what is owed and the final sales price as income to the IRS.

If you sell your property AFTER Dec 31st, 2012, through a short sale or foreclosure, you will have to pay the taxes on the amount of the difference.  Sell it before that date, and you are covered under this program.

Example:  If you owe $300,000 and your property is worth $200,00 currently and you sell it for a settled amount (short sale or foreclosure), the difference of $100,000 is reported as income from your lender.

Since most people fall into a tax bracket near 35%, the following example shows potential tax liability.

Before the date, as mentioned above, Covered – $0 owed to IRS.  After the date – 35% @ $100,000 = $35,000 in additional taxes owed to the IRS.

Part 1:  The Mortgage Forgiveness Debt Relief Act is set to expire on December 31st, 2012.

Two things you will need to know, the current value of your property, and the amount of money you owe on your property.  If you decided to sell your home after the date, this is your likely scenario.  You owe more than it’s worth, and selling would give you a difference that is reported as income by your lender.  That amount is NOT taxable in most cases if that settlement is done prior to that date.  If it is completed after Dec 31st, 2012, take your tax bracket (typically 35%) and multiply it by the potential difference.  This is the amount you will owe to the IRS.

This is how the Act reads:  “The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence.  Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.”

This applies to short sales and foreclosures.

Part 2 – What do you want to do with your home?

If you plan on keeping your property for the next 15 years, you don’t need to do anything.  However, if you plan on selling your home within the next 15 years, you may want to consider your options.  The biggest piece of the equation is your property value vs what you currently owe on your property.  Since the majority of properties in Arizona are so far over leveraged, it’s likely that most homeowners will not see an break even point to their property value from what they owe until 2030 or beyond.

Part 3 – Action Steps

Find out the current value of your home.  If you decide to work with us, have one of our reps use our appreciation calculator to find an estimation on how much your property is going to be worth in your selling time frame.  If the balance of what you owe is STILL greater than the appreciated value in that time frame, pursue a short sale RIGHT NOW!  Do not wait one more second to do so.

We hope this sheds a little light on your possible decision.  If you haven’t submitted your information to us to assist you in your short sale process, do so immediately.  Our trusted resources, access to legal experts and short sale specialists, can help guide you through the pitfalls of this process.

Please view the IRS Mortgage Forgiveness Debt Relief Act in its entirety to see if your home qualifies.

DON’T DELAY – IT CAN COST YOU THOUSANDS OF DOLLARS BY WAITING!