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Tax Relief Act set to expire in December ’12

REAL ESTATE REPORT

LAUREN BUNTING ¦ Contributing Writer

(Nov. 23, 2012) With Congress returning soon to Washington, one of the looming items to decide on is a housing issue that could affect nearly 25 percent of all real estate transactions, according to the Maryland Association of Realtors. The housing issue in question is the expiration of Mortgage Forgiveness Tax Relief (MFTR) on Dec. 31.

The Mortgage Forgiveness Tax Relief Act was enacted in December 2007 and provides relief to troubled borrowers when some portion of the mortgage debt is forgiven by a lender in the event of a short sale, foreclosure or modification. Prior to the enactment of the MFTR, the amount of forgiven mortgage debt would have been treated as income, and taxed at ordinary income rates.

Example: Assume a family purchased a home for $175,000 with a mortgage of $150,000. Later, they need to sell the home. They find that the value of homes in their area has declined and they can sell for only $120,000.

At the time of the sale, the outstanding balance on their mortgage is $132,000. Thus, there will not be enough cash at settlement to repay the lender the full balance of the mortgage. If the lender forgives the entire difference between the amount owed and the sales price, the amount that could be taxable is $12,000.

So, a seller who experiences a true economic loss would have been required to pay tax on this “phantom income.” It’s been labeled “phantom income” because it is considered income even though no cash has changed hands and the seller has experienced a loss. Under the MFTR current law, the forgiven amount is not subject to income tax.

Without action before the end of the year, millions of families who are faced with selling a distressed property could be required to pay a large tax bill for trying to modify their mortgage or to seek a short sale through their lender.

If you agree that no taxpayer should be forced to pay tax on money they’ve already lost with cash they never received, please contact your local representatives and senator to urge them to vote for an extension of the Mortgage Forgiveness Tax Relief.

— Lauren Bunting is a member of the Coastal Association of Realtors and a licensed Realtor with Bunting Realty Inc. in Berlin.

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