The President has extended the Mortgage Forgiveness
Debt Relief Act through the end of 2016 by signing Congress’ Spending
Bill
into law. As a result, the amount of money from a mortgage loan that is forgiven
incident to a short sale, foreclosure or deed-in-lieu of foreclosure will not
be taxable as income.
In the last week of 2014, the extension was passed and
then applied to all transactions that occurred in 2014, retroactively. Homeowners
closed transactions assuming that they were paying income tax on the forgiven
debt. As a result, homeowners elected not to pursue a short sale or
deed-in-lieu when it turned out to be their best strategic option.
Now that the law proactively extends throughout 2016,
homeowners in financial distress can list their homes for short sale, or work
out a deed-in-lieu with their lender, without the fear of being hit with a
severe income tax bill.
Another important provision of the Spending Bill,
beyond the Mortgage Forgiveness Debt Relief Act extension, concerns mortgage
insurance premiums, which are required for mortgage loans that exceed 80% of
the purchase price of a home (and is required to be paid until the loan balance
goes below 80% of the purchase price). Pursuant to the new law, premium
payments can now be deducted from borrower’s income tax, in the same manner as
mortgage interest, through 2016. This will continue to encourage homeowners who
may not have the funds for a 20% deposit to still be able to purchase a home.
