What will happen when the Debt Relief Act of 2007 expires at the end of the year?

[thejq]

Debt Relief Act of 2007 allows the primary home owner to short sale the property and not having to worry about tax consequences. But it’s set to expire (if not extended) at the end of the year. So after that, anyone who short sale would incur huge amount of tax liability. So I would expect much less short sale and more foreclosures. I don’t think it will affect the housing that much, but it might affect the economy, since more people will be forced to file BK or foreclosure.

[sdduuuude]

It’s a good question, but probably a moot one. Expecting the gov to not kick the can again is foolish – it will probably be extended.

ASSUMING IT EXPIRES –
It wouldn’t change the number of distressed properties, only how those distressed properties are handled. So I don’t think it would dramatically change the housing market itself but I think it would allow us to move distressed properties through the market a little faster.

It all depends on the banks. If banks choose to foreclose faster if short sales are less likely, it could bring some inventory into the market. But, I don’t understand what the banks are doing now so I’m not gonna guess what they would do if …

[CA renter]

Good question, and I’ve often wondered how they were going to handle this going forward. Maybe they’ll extend it, but there’s not been much talk about it, which leads me to believe there’s a pretty good chance it will expire.

I’ve told everyone I know who’s been struggling with housing payments that they need to make a determination now, and if they intend to short sell or have it foreclosed on, they need to do so immediately.

Conspiracy time (just popped up right now)…maybe this is why they’re holding off on all the foreclosures. They know that people will be much less likely to let their homes go into foreclosure if they’re going to be responsible for possibly tens of thousands of dollars in taxes. Maybe the lenders are hoping this will keep people in debt slavery, even though it would have been better for them to dump their houses/loans pre-2013.

It will be interesting to see how this goes down.

[urbanrealtor]

[quote=CA renter]Good question, and I’ve often wondered how they were going to handle this going forward. Maybe they’ll extend it, but there’s not been much talk about it, which leads me to believe there’s a pretty good chance it will expire.

I’ve told everyone I know who’s been struggling with housing payments that they need to make a determination now, and if they intend to short sell or have it foreclosed on, they need to do so immediately.

Conspiracy time (just popped up right now)…maybe this is why they’re holding off on all the foreclosures. They know that people will be much less likely to let their homes go into foreclosure if they’re going to be responsible for possibly tens of thousands of dollars in taxes. Maybe the lenders are hoping this will keep people in debt slavery, even though it would have been better for them to dump their houses/loans pre-2013.

It will be interesting to see how this goes down.[/quote]

Actually the debt relief act only relates to shorts and dil’s.

Foreclosure already has had that provision for like 30 years.

Actually letting it sunset means making foreclosure more financially secure than short selling.

For that reason, I consider the sunset to be unlikely.

I suspect it will be extended with indefinite provisions.

My 2 bits.

[CA renter]

Thanks for the clarification, UR.

They made it sound like it was a new provision under the Debt Relief Act.

From the IRS:

“Update Dec. 11, 2008 — The Mortgage Forgiveness Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualify for this relief.”

http://www.irs.gov/uac/Home-Foreclosure-and-Debt-Cancellation

———

Interesting to note that it is technically only for non-recourse loans. For recourse loans, borrowers are on the hook for any gains unless they lived in it for 2 out of 5 consecutive years (cap gains exclusion of $250K/$500K). Of course, we don’t really know how well they enforce this.

From the IRS:

“Step 1 – Figuring Cancellation of Debt Income (Note: For non-recourse loans, skip this section. You have no income from cancellation of debt.)

1. Enter the total amount of the debt immediately prior to the foreclosure.___$220,000__
2. Enter the fair market value of the property from Form 1099-C, box 7. ___$200,000__
3. Subtract line 2 from line 1.If less than zero, enter zero.___$20,000__

The amount on line 3 will generally equal the amount shown in box 2 of Form 1099-C. This amount is taxable unless you meet one of the exceptions in question 2. Enter it on line 21, Other Income, of your Form 1040.

Step 2 – Figuring Gain from Foreclosure

4. Enter the fair market value of the property foreclosed.For non-recourse loans, enter the amount of the debt immediately prior to the foreclosure. __$200,000__
5. Enter your adjusted basis in the property.(Usually your purchase price plus the cost of any major improvements.) ___$170,000__
6. Subtract line 5 from line 4.If less than zero, enter zero.___$30,000__

The amount on line 6 is your gain from the foreclosure of your home. If you have owned and used the home as your principal residence for periods totaling at least two years during the five year period ending on the date of the foreclosure, you may exclude up to $250,000 (up to $500,000 for married couples filing a joint return) from income. If you do not qualify for this exclusion, or your gain exceeds $250,000 ($500,000 for married couples filing a joint return), report the taxable amount on Schedule D, Capital Gains and Losses.

In this situation, the borrower has a tax-free home-sale gain of $30,000 ($200,000 minus $170,000), because they owned and lived in their home as a principal residence for at least two years. Ordinarily, the borrower would also have taxable debt-forgiveness income of $20,000 ($220,000 minus $200,000). But since the borrower’s liabilities exceed assets by $20,000 ($250,000 minus $230,000) there is no tax on the canceled debt.”

http://www.irs.gov/uac/Home-Foreclosure-and-Debt-Cancellation

[urbanrealtor]

In fairness to your concern here, the information I get is primarily anecdotal from accountants and attorneys.

Ergo, it is possible the the older version of which I was informed is ensconced in the a different part of the code or was overwritten by the 2007 code.

Or it could have just been erroneously cited (repeatedly) thus making me full of shit.

I really cannot say which.

[CA renter]

[quote=urbanrealtor]In fairness to your concern here, the information I get is primarily anecdotal from accountants and attorneys.

Ergo, it is possible the the older version of which I was informed is ensconced in the a different part of the code or was overwritten by the 2007 code.

Or it could have just been erroneously cited (repeatedly) thus making me full of shit.

I really cannot say which.[/quote]

No, you were right, but it technically only applies to non-recourse loans.

I was not aware that debt forgiven via foreclosure wasn’t taxable prior to the Debt Relief Act.

[Author]

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