Unfortunately for many homeowners in Florida who own property with mortgage balances larger than the property’s value, the Mortgage Forgiveness Debt Relief Act (the “Act”) expired on December 31, 2013. The Act once created an exemption from taxation for discharge of indebtedness income when it related to the sale of a qualified principal residence.
When approving a short sale, loan modification, and in certain other situations, mortgage lenders sometimes forgive and write off a portion of the principal debt owed to the lender by the borrower under the mortgage loan. The IRS considers this forgiven housing debt taxable income as “discharge of indebtedness income.” Under the Act, if the property connected to the mortgage loan qualified as the borrower’s principal residence, an exemption from taxation would apply to any income otherwise recognized by the IRS for the amount of debt forgiven. Without this exemption, homeowners completing a short sale of their principal residence because of ongoing financial hardship could potentially face an unexpected and large income tax bill that they may not have the ability to pay.
Congress may approve yet another extension of the Act, but at this time, whether or not this will happen remains uncertain.
If you are considering a short sale or loan modification and would like more information on how the expiration of the Act may affect you, contact a real estate attorney.