January 1st, 2013: Senate overwhelmingly passed H.R. 8 with the House approving it less than 24 hours later by a much lower margin. H.R. 8, dubbed the Job Protection and Recession Prevention Act of 2012 addresses many tax deductions that were due to expire today (January 1st, 2013.) but it’s now on it’s way to the President’s desk to be signed.
Nestled deep in the bill is Section 202: Extension of Exclusion from Gross Income of Discharge of Qualified Principal Residence Indebtedness.
Here is Section 202 (page 25 of this PDF) in it’s entirety:
SEC. 202. EXTENSION OF EXCLUSION FROM GROSS INCOME OF DISCHARGE OF QUALIFIED PRINCIPAL RESIDENCE INDEBTEDNESS.
- (a) IN GENERAL.—Subparagraph (E) of section 108 (1) is amended by striking ‘‘January 1, 2013’’ and inserting ‘‘January 1, 2014’’.
- (b) EFFECTIVE DATE.—The amendment made by this section shall apply to indebtedness discharged after December 31, 2012.
Why is the Extension of Mortgage Debt so Important?
The amendment made by this section shall apply to indebtedness discharged after December 31, 2012.
If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances.
When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is normally reportable as income because you no longer have an obligation to repay the lender.
The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt. The Form 1099-C, once reported to the IRS becomes taxable income for the tax year in which it was reported.
Not only can this mean a potentially huge increase in the personal taxes you owe, completely wiping out any refund you were counting on, it can also kick you into a higher tax bracket!
Last Chance to Short Sale
I am still a huge fan of Short Sale or Deed in Lieu of foreclosure as alternatives to foreclosure. Not only can you re-enter the real estate market and buy another home sooner, it’s karmically a better choice as you are proactively approaching the lender and warning them that default on your mortgage is inevitable.
Conventional financing considers this a “positive step” on your part and will allow you to buy anywhere from 4 to 5 years sooner than if you were to allow the home to go into foreclosure and let the bank take back the home.
I would love to think that FHA would also consider short sale or deed in lieu of foreclosure as a more responsible alternative to defaulting on your mortgage and loosen their guidelines for buying as well.
Don’t Expect Another Extension
Don’t look this gift horse in the mouth! If default on the mortgage for your primary residence looks to be an inevitability, reach out to a Real Estate agent that specializes in short sales and start exploring your options.
If you don’t know of a Real Estate agent that can help, I am happy to refer you to one of the many highly experienced agents I have met and worked with throughout the years.
Let’s cross our fingers and hope that by the time you’re reading this that it’s a done deal!