STATUS OF DEBT FORGIVENESS TAX RELIEF
After the Real Estate market began crashing in late 2006, people who lost their homes to foreclosure or short sale or even those who got a loan modification .received a nasty surprise. Their lenders sent them a 1099 Tax form identifying how much of the debt had not been repaid, ie: forgiven. The IRS and most States (including California) treat forgiven debt as taxable income to be reported on your tax return and subject to income tax. Thus, someone receiving $100,000 in debt forgiveness could find themselves liable for a tax of 30-40% or more… without having ever received the money. It was a financial disaster for millions of Americans.
To provide some relief, Congress passed the Debt Forgiveness Relief Act of 2007 which provided a tax exemption for personal residences. The Act initially expired in 2009 but was repeatedly extended. Most States matched the Fed in granting the relief. When the Act expired at the end of 2013, most real estate professionals thought it was over even though millions of American homeowners were still upside down.
Having knowledge of the Act’s status is critical for someone deciding whether to short sell or possibly let their home go into foreclosure. Either process can take many months. However, for virtually all of 2014, no Tax Relief was available. Finally, on December 16, 2014, Congress extended the Act once again but only through the end of 2014.While this brought relief to those who were forced to lose their homes in 2014, it was way too late for anyone trying to plan to avoid the taxation.
As of today, 4 months into 2015, there is no tax relief available but two Bills are making their way through Congress which may extend the Act. In the House of Representatives, HR1002 is in the Ways and Means Committee. In the Senate, S.351 is in the Banking Committee. Both Bills propose to extend Debt Forgiveness Tax Relief through the end of 2016.
There does appear to be broad support for passing a Tax Relief bill of some form. Once the Committees have vetted the Bills, action will proceed to getting approval in the House and Senate of a combined Bill that can be sent to the President for signing. He has indicated that he will support the extension.
Will anything actually get passed and signed into law? That will remain to be seen. We are just entering the Presidential election process which will run through next year. How much political football will be played with this and other Bills is unclear. Hopefully, since support for passage appears strong in both the Republican and Democrat parties, we may get any early approval.
Here at BPE Law, we’ll be keeping track of the status of these Bills and any similar legislation that comes up. We’ll report any changes we hear of and, of course, let you know as soon as any extension passes.
For over 20 years, the attorneys of BPE Law Group, P.C. have been advising and representing property owners and real estate licensees in dealing with their legal concerns and maximizing their opportunities. If you would like a consultation with us, please call our office at (916) 966-2260. If you have legal questions, give us a call at 916-966-2260 or e-mail firstname.lastname@example.org. Our flat fee consult for new clients may get you the answers you need for the questions you have.
The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. If you are facing a legal issue of any kind, get competent legal advice in your State immediately so that you can determine your best options.