What does the end of mortgage forgiveness mean for you?
According to RealEstate.com more than 10 million Americans have negative equity in their homes right now. This means homeowners owe more money on their mortgages than their homes are worth. The House of Representatives created the Mortgage Forgiveness Debt Relief Act of 2007 as a way to help these homeowners who were forced into a short sale or foreclose on their homes.
What is mortgage forgiveness and why is it ending?
The Mortgage Forgiveness Debt Relief Act of 2007 was designed to protect homeowners from paying income tax on any mortgage debt that was forgiven from 2007 to 2009.
Prior to the act coming into affect, the Internal Revenue Service (IRS) considered all forgiven debt as ordinary income. If the homeowner couldn't afford their mortgage payments they would be forced into foreclosure or a short sale. Then they would have to pay tax on the amount of debt that was forgiven. So in addition to losing their home, homeowners would be stuck with a huge tax bill at the end of the year.
Under the Mortgage Forgiveness Debt Relief Act of 2007, eligible debts for forgiveness included any debt used to purchase, refinance, or upgrade a personal residence as long as it was secured by an interest attached to the same residence. Investment properties were not eligible for mortgage forgiveness and neither were debts secured on one property to purchase another.
The act was originally set to expire at the end of 2009, but Congress has since extended it twice. Unfortunately for some homeowners, the act was not extended by the House of Representatives and therefore expired on December 31, 2013.
What you need to know if you received mortgage forgiveness
As of Jan. 1, 2014 any mortgage debt that is forgiven (i.e. written off) will be taxable for homeowners because it will now once again be considered as ordinary income on their personal tax return.
Lenders will be sending out IRS form 1099-C, Cancellation of Debt to all homeowners who have had mortgage forgiveness. However, there is some good news. If you can prove to the IRS that your total debts amounted to more than your total personal assets when you received mortgage forgiveness you may not be taxed on the forgiven debt.
Now that tax season has ended, you may not want to start thinking about next year's, but if 2014 will be your first year without Mortgage Forgiveness Debt Relief Act, you should consider speaking to a tax specialist so you'll know what to expect.