Mortgage Forgiveness Debt Relief Act Set to Expire…

As we move past the halfway point of 2012, we’re now less than six months away from the expiration of the Mortgage Forgiveness Debt Relief Act (MFDRA).  Initially passed by Congress in 2007, it prevented homeowners who had completed a short sale, a loan modification with a principle reduction or a foreclosure, from paying taxes on the deficiency.

Prior to 2007, had someone completed a short sale on a home for which they owed $200,000 but could only sell for $150,000 for example, they’d have paid a tax on the $50,000 that was forgiven.

Moe Veissi, president of the National Association of Realtors (NAR):

"Homeowners facing a short sale or foreclosure are already in financial distress and are most likely unable to pay additional taxes…  these individuals have suffered through an economically devastating short sale or foreclosure of their home, and in many instances are unable to pay additional taxes, which only adds to their overall burden."

While we’re still a long way from the Real Estate crisis from being over, not extending the MFDRA beyond 2012 will likely reverse the small steps we’ve made toward recovery.

Currently, the MFDRA allows homeowners to work their way out of a bad situation and move forward with their lives, minus the burden of a huge tax obligation hanging over their heads.

Should the MFDRA be allowed to expire, bankruptcies could reach record numbers.  In the example used above, if your combined federal and state marginal tax rate is 36%, you would owe $18,000 in taxes on the $50,000 deficiency.  Few can afford to make a payment like that and with household incomes back to where they were in the early 1990’s, many will be able to prove insolvency, qualifying them for chapter 7 bankruptcy – wiping the debt out, leaving them in financial ruin and earning the IRS $0.

By extending the MFDRA, people will likely have an easier time keeping their head above water, while continuing to contribute to the overall growth of the economy.

Several bills have been introduced in the Senate and Congress, seeking to extend the MFDRA.  Senator Debbie Stabenow of Michigan has requested it be extended through 2013, while Representative’s Tom Reed and Charlie Rangel (both of New York), have introduced separate bills extending it by one and two years respectively.

The MFDRA originally introduced in 2007 was set to expire on December 31st 2009, but it was extended 3 months prior to its expiration - meaning we still have time.  Call or write your Senator or Congressional Representative today and let them know how you feel about an extension.

You can read more about it here, at CBS News.