Many sellers have anxiously counted down the days to the end of 2012 and the expiration of the Mortgage Debt Relief Act which prevented sellers from having to pay income tax on debt forgiven in a short sale. They watched in horror as the ball dropped on New Year’s Eve and panicked because their sale hadn’t yet recorded and no deal had yet been struck! Was it too late to cancel the contract? I mean it’s better to have a foreclosure than a $20,000 tax bill, right? Can you even file bankruptcy on tax debt?! Let the spiral continue.
Well, never fear because The American Taxpayer Relief Act of 2012 (affectionately referred to as the Fiscal Cliff Deal) which passed late last night has upheld the debt forgiveness law as suggested in this Housing Wire article excerpt:
“One of the more watched provisions of the fiscal cliff was the Mortgage Forgiveness Debt Relief Act of 2007, which was set to expire on Dec. 31.
The fiscal cliff deal extends it for another year, meaning homeowners who experience a debt reduction through mortgage principal forgiveness or a short sale are exempt from being taxed on the forgiven amount.”
Good news for sellers and great news for our economy!
See the full article here. The settlement will also extend a law that expired in the end of 2011 which allowed for the deductibility of mortgage insurance premiums. Additionally, capital gains rates are to rise from 15% to 20% for high-income earners. However, capital gains rates on the sale of principal residences will remain unchanged and continues to exclude the first $250,000 for single taxpayers and $500,000 for married couples.