Lobbying by the National Association of Realtors and the National Association of Home Builders proved successful in the first step, August 2nd when the United States Senate Finance Committee voted to pass an extension of the Mortgage Debt Relief Act through 2013. The Finance Committee Bill now heads to the full Senate for possible action in September. The U.S. House of Representatives must also act but there is currently hope on that front as well. The Homeowner Tax Fairness Act is currently pending in the House and if passed would extend the MDRA through 2015.
The Mortgage Debt Relief Act(MDRA) allows a homeowner to exclude as 1099-C income, debt forgiven by lenders, deed in lieu of foreclosure or a loan modification. Without the MDRA the tax burden imposed on a homeowner utilizing one of these options would pose a serious threat to the ability to climb out from under water.
To qualify under the Mortgage Debt Relief Act home owners need to meet a four-prong test. 1. The Loan Must predate 2009 2. The Loan must be less than $1 million for individuals or $2 million for couples filing jointly 3. The home must be the taxpayer’s primary residence 4. The Loan must have been to purchase or improve the home.
Of course any piece of pending legislation would have to be reconciled before hitting the White House for a signature before any extension is on the books. So if you’re considering the short sale of a primary residence keep a close eye on this as we approach the end of 2012. Contact the Real Estate Radio Hour if you have questions or to be put in touch with a short-sale specialist.