Mortgage forgiveness deadline


By Jocelyn P. PorteriaBy Jocelyn P. Porteria

If you are thinking of doing a short sale, you might as well ACT FAST AND DO IT NOW!!!  If you are experiencing hardship and owes more than the value of your home, you may want to consider doing a short sale especially if you have been turned down on loan modification multiple times.

The Mortgage Forgiveness Debt Relief Act and Debt Cancellation program ends in 2012.  Meaning, any debt cancelled by January 1, 2013 will be taxable.  Once you do the short sale, any amount forgiven should be taxable as you will receive 1099 from the banks or lenders that service your mortgage.  This should be counted as your income.  Imagine an additional $100,000 income on your Income Tax Return?  However;   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 short sales and foreclosures qualifies for the relief.  There is a pending proposal as to an extension on this ACT paralleled to the HAFA Program (Home Affordable and Foreclosure Alternative) which was extended until 2013.  Until the Debt Forgiveness ACT is approved, you are at risk to get taxed on forgiven debt passed 2012.

What is the difference between HAFA and the Debt Relief Act?  HAFA was designed for homeowners who want to sell their principal residence but the fair market value is less than the pay off amount of the mortgage.  For example, fair market value of your home that is based on the current SOLD properties in your area is $200,000 and you owe $300,000.  That is when you do short sales when bank agrees to a short pay off and forgive the difference.  In addition, you will still receive $3,000 relocation assistance and offer the second mortgage (if applicable) up to 6% of the pay off amount.  Both lenders waived their rights to collect the deficiency of the loan.  That will set you free from any responsibilities or future payment for that loan.  That is on the loan part.


Debt Forgiveness Act is based on your income tax returns.  The difference on your debt maybe forgiven or waived by the lender; however you have to report as income on your income tax returns if the sale of your home took place after 2012.  That is the big difference.  There is an insolvency issue that may prevent you from paying taxes even after the ACT expires.  It is a little bit complicated as you have to prove to the extent that your total liabilities should be more than your total assets including all you own and the interest on your pension plans and value of the retirement account.

So, if you have hardship and have tried loan modification but consistently declined by your lender; you better resort to short sales rather than foreclosures.  Foreclosures most of the times do not waive your loan balance once your property is sold by the lender in Auctions and Foreclosure Sales and so with the tax implications.  Another hit will be your credit scores and credit history that may stay there for up to ten years.  With short sales, you may be qualified to purchase another home for as short as two years or so.  After short sales, you can move on and build up your credit again.

  Note:  Jocelyn Porteria is a Realtor® licensed in VA. She earned a designation of ABR, GRN Accredited Buyer’s Specialist and GREEN Designation, CDPE Certified Distressed Property and Short Sale Expert, (SFR) Short Sales and Foreclosure Resource. For more info, visit her website at or call her at 571-432-8335 or email at   for a free confidential evaluation of your individual situation, property value, and possible options. She is also an accredited agent of Ayala Land, SM Residences and Century Properties in the Philippines


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