Perhaps a sign of the real estate recovery, six years after the market crash, the 2007 Mortgage Debt Relief Act (the “Act”) has finally expired. Although the Act had already been extended twice, many remained hopeful – including Attorney General Tom Horne and the Attorney Generals from 41 other states – that Congress would extend the Act for another year.
The Act provided a windfall for borrowers who experienced a short sale, loan modification, or foreclosure of their principal residence by exempting any mortgage debt forgiveness from their taxable income. The goal was to spare down-on-their luck homeowners insult from injury.
As discussed in the June 2013 edition of the Arizona Real Estate Journal, “How to Minimize or Eliminate Tax Liability Regarding Mortgage Debt Forgiveness, the end of the Act will have minimal impact in Arizona. Most borrowers are protected from mortgage debt forgiveness tax by the “non-recourse” exception, the insolvency exemption, or can claim a capital loss if the property was an investment property.
Still rumors abound that the Act will be extended yet again, retroactively to the end of last year. Many believed that the Act’s extension would be included as legislation within the colossal $1.1 trillion spending budget that was passed by both houses last week. But no such luck.
As of the date of this article, there are at least three bills pending in Congress to extend the Act: H.R. 2788 (seeks to extend the Act for another year); H.R. 2994 (seeks to extend the Act for two more years); and S.1187 (seeks to extend the Act for two more years). All three of the bills would have an effective date of December 31, 2013, effectively preventing the Act from ever expiring.
Relying on Congress to act is rarely a prudent strategy. A better approach is to “hope for the best but plan for the worst.” If you or someone you know would like to discuss legal strategies to “plan for the worst,” please call our office today to schedule an appointment.