Seattle Homeowners Beware: An Important Tax Break Is Set To Expire

Any person coping with a distressed mortgage situation should get things worked out prior to the end of 2012…

A valuable tax break for thousands of homeowners is set to end at the end of the year.

For the last five years, the federal government has provided tax breaks to distressed property owners who cut a deal with their mortgage lender to reduce or release home mortgage debt. But unless members of Congress confirm an extension, starting next year any break you get on your home mortgage debt will be deemed taxable income.

In distressed mortgage circumstances like we’re observing across the nation, the lender’s monetary loss is regarded a financial asset to the homeowner who avoids paying their full debt. In a short sale for instance, where your mortgage balance is $250,000 and your home sells for $200,000, the remaining balance of $50,000 is deemed forgiven debt and would usually be ruled taxable income.

But since 2007, under the Mortgage Forgiveness Debt Relief Act, forgiven debt has been tax free. That’s set to change after the end of this year.

If nothing changes, in 2013 mortgage loan debt that’s forgiven is going to be treated as taxable income.

So if you are facing a distressed mortgage scenario you should get the details worked out before the end of the 2012, to be on the safe side.

What qualifies for the income tax break? Short sales, loan modifications, deed in lieu transactions, where you turn your home over to the bank, and in many cases, foreclosure. Just bear in mind the Debt Relief Act only applies to principle residences. It does not apply to rental property or second homes.

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