Friday, December 21, 2007

Tax Relief for Homeowners Who Receive Debt Forgiveness!

Many people didn't know it, but until today if you sold your Las Vegas home on a short sale or lost it through foreclosure, you owed taxes to the IRS on the portion of the debt that was forgiven by the mortgage company. Yes, not only did you lose your home, you also had to pay Uncle Sam to do so!!

There has been pending legislation in Congress to amend the Internal Revenue Code of 1986. Previously if there was a shortsale on your home and your Las Vegas mortgage company "forgave" part of the mortgage (in other words, they agreed to take less than they were owed) the amount "forgiven" was added to your gross income and you owe taxes on it. For example, you owned a home and your mortgage balance was $275,000. The home sold for $250,000 - the bank agreed to take $25,000 less than what it was owed. You made $60,000 per year. The $25,000 the bank "forgave" was added on to your $60,000 income and now you owed taxes on $85,000. Not only did you owe more money, it could also raise your overall income bracket!

The new amendment excludes discharges of debt from residential mortgage obligations from gross income. It only applies to a principal residence, not to an investment property. The legislation was introduced in April 2007, and on December 14, 2007 it passed both houses and then was sent on to President George W. Bush.

The President signed the legislation into law on Thursday. The bill — Mortgage Forgiveness Debt Relief Act — has been supported by NAR since the 1990s. "The president offered a Christmas present to many people who have suffered the agony and humiliation of losing their home," said NAR President Dick Gaylord in a statement. “Today’s bill will ensure that any debt forgiven on a mortgage secured for a principal residence will not be taxed. This is very significant legislation." This amendment will only apply to a principal residence or home someone has lived in for part of the last 5 years (partial exclusion of the income is possible.) Again, it does not apply to Las Vegas investment property.

Also this week the House passed another bill (which has already passed the Senate) that could have a big impact on the real estate industry. The Mortgage Insurance Tax Deductibility Bill makes mortgage insurance premiums tax deductible for all mortgages originated for the next three years. Mortgage insurer Genworth Financial estimates that this tax break is worth $350 to the average taxpayer who has purchased a home with less than 20 percent down.