Homeowners will have only a short time to escape paying income taxes on their homes if they've filed for bankruptcy or a short sale. With approval from their lender, their debt can be relieved income tax free.
(prHWY.com) December 1, 2012 - Manhattan, NY -- Homeowners will have only a short time to escape paying income taxes on their homes if they've filed for bankruptcy or a short sale. With approval from their lender, their debt can be relieved income tax free. But 2013 is bringing big changes. The amount their lender forgives will be taxable on federal income taxes.
The Mortgage Forgiveness Debt Relief Act of 2007 expires at the end of this year. It was put into place after the housing market crash to help struggling homeowners pay their mortgages. Unless Congress extends the bill, there will be no more relief provided.
"Starting in 2013, homeowners who short sell their $150,000 home for $120,000 will have to pay taxes on the $30,000 worth of debt that was forgiven, because the federal government considers it income, even though homeowners never actually put any of this "phantom" income in their pockets," CBS news said.
The National Association of Realtors (NAS) has expressed how negatively this will affect those who are still trying to pay off their mortgages. Not only are homeowners already in a financial crisis, but the added taxes will not alleviate the problem, according to Moe Veissi, president of the National Association of Realtors. "These individuals have suffered through an economically devastating short sale or foreclosure of their home, and in many instances are unable to pay an additional tax, which only adds to their overall burden," Veissi said.
Even if the bill is extended, not all homeowners will be able to take advantage of this program. If money was borrowed from refinancing and it wasn't used to buy a home, improve a home, or construct a home, then the income tax relief does not apply. The only other way to avoid paying income taxes is if the homeowner is considered insolvent. Insolvency is the situation where the homeowner's debts are higher than their assets the day before and the day after a foreclosure or short sale. For example, if your home's fair market value was $900,000, your mortgage was $1 million, but you had credit card debt worth $6 million, you would be considered insolvent.
Earlier this year, President Obama proposed a two year extension of the Debt Relief Act. The overall price tag of this extension for two years would cost $2.7 billion according to the Congressional Budget Office.
If the bill is not extended, the only successful way to avoid paying income taxes is to file for bankruptcy. This relieves a person of certain types of personal debt; including credit cards,
personal loans, or medical bills, while allowing them to retain certain assets, such as their home or vehicle. This can be a very overwhelming process, so consulting a Legal Documentation Preparer, such as We the People, can make bankruptcy filing easier. Visit
www.wethepeopleusa.com to find out if you're eligible to file for Chapter 7 bankruptcy.
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