From: Charles Cox [mailto:firstname.lastname@example.org]
Sent: Monday, December 10, 2012 6:02 AM
To: Charles Cox
Subject: Tax Break for Mortgage Forgiveness Set to Expire on December 31, 2012
Tax Break for Mortgage Forgiveness Set to Expire on December 31, 2012
by Jonathan Ginsberg, Atlanta Bankruptcy Attorney
Unless Congress acts, the Mortgage Forgiveness Debt Relief Act of 2007 will expire on December 31, 2012.
What is this law, you may ask. Stated simply the Mortgage Forgiveness Debt Relief Act waives any tax due on debt forgiveness if you are able to negotiate a mortgage modification. Without this waiver, any amount of forgiven debt will be treated as ordinary income and taxed accordingly.
Here’s an example: let’s say that you owe $100,000 on your mortgage. Your property value has gone down and you are able to convince the bank to reduce your principal balance to $80,000, The $20,000 of debt forgiveness would be considered income by the IRS and you would be taxed on this. Currently, this tax is eliminated by the Mortgage Forgiveness law, but this waiver comes to an end on December 31, 2012.
Mortgage modification is already a time consuming, difficult process. Homeowners typically apply for modifications because they are struggling financially. If these homeowners discover that they will be facing a tax bill for debt forgiveness, many will conclude that there is no point in pursuing a modification and will decide to either walk away or file bankruptcy to deal with their upside down mortgages.
In November, 2012, forty-one state attorney’s general sent Congress a letter urging lawmakers to extend the Mortgage Forgiveness Debt Act. In this letter the attorney’s general note that the elimination of the Mortgage Forgiveness break will greatly undercut the $20 billion mortgage settlement negotiated earlier this year with the nation’s largest mortgage lenders.
Senate bill 3521 has been introduced by Senator Max Baucus of Montana but it currently has no co-sponsors. If you are contemplating a modification with your bank, I urge you to contact your Senator or Representative to urge him/her to support S.3521.
by Jonathan Ginsberg, Atlanta bankruptcy