In less than four months one of the clearest safeguards for Arizona’s distressed homeowners attempting a short sale is set to expire. The Mortgage Forgiveness Debt Relief Act of 2007 (“Act”) has made the choice between short sale and foreclosure a much easier one to make, and it may just stick around for an additional year.
In early-August the Senate Finance Committee approved a bipartisan bill to extend the Mortgage Forgiveness Debt Relief Act for an additional year to the end of 2013. Next up for the bill is a vote on the floor of the Senate expected to take place sometime in September, where it is expected to pass. The final obstacle is whether the bill can make it through the House of Representatives. Some speculate a one-year extension of the Mortgage Forgiveness Debt Relief Act could cost as much as $1.3 billion in lost tax revenue. Absent the extension, homeowners face foreclosure, bankruptcy, or qualifying within the insolvency provision of the Tax Code to avoid paying taxes on their forgiven debt.
For Arizona home owners, next to the state’s anti-deficiency statute the greatest relief has been the Act. Under the IRS Tax Code forgiven debt or debt cancellation – such as when a homeowner successfully completes a short sale and the lender waives the deficiency balance on a principal mortgage loan – is considered “regular income” to the borrower, which for some Arizonans can mean tens of thousands of dollars in tax liability. Unfortunately, if the Act expires at the end of 2012 far more questions than answers are going to arise as to the treatment of the canceled debt, and even whether a homeowner is better off with a foreclosure over a short sale.
News of the Mortgage Forgiveness Debt Relief Act’s extension (provided it passes) means hope and continued possibilities for homeowners.