Expiration of the Mortgage Forgiveness Debt Relief Act
Under Federal law, a financial institution is required to file a Form 1099-C with the IRS whenever it cancels or forgives a loan balance. In California, the canceled debt is treated as “income” for tax purposes. This can lead to a financial disaster for homeowners considering foreclosure or short-sale.
The Mortgage Forgiveness Debt relief Act of 2007 (the “Act”) provided relief for homeowners who borrowed up to $2 million dollars against their principal residence. However, the Act only applies to debt forgiven in calendar years 2007 through 2012. With the impending expiration of the Act on December 31, 2012, homeowners considering foreclosure or short-sale need to act immediately.
In California, foreclosures are backlogged and short-sales can take several months to complete.
If you are a homeowner considering foreclosure or short-sale, consult with a legal professional or financial advisor to prepare for the 2013 tax year.