I’ve just heard some great news for homeowners defending foreclosures and pursuing workout options with their mortgage lender. The Consolidated Appropriations Act of 2016, the behemoth spending bill passed by Congress every year, contained hidden within it an extension of the Mortgage Forgiveness Debt Relief Act. This is great news for my foreclosure defense clients! This blog post outlines (1) what the bill says, (2) why it’s a big deal, and (3) what steps you can take to avoid big income tax liability in the future if you’re facing foreclosure.
Read it yourself.
Buried on pages 824 and 825 of the PDF file published by the GPO contains the following provision:
SEC. 151. EXTENSION AND MODIFICATION OF EXCLUSION FROM GROSS INCOME OF DISCHARGE OF QUALIFIED PRINCIPAL RESIDENCE INDEBTEDNESS.
(a) EXTENSION.—Section 108(a)(1)(E) is amended by striking “January 1, 2015” and inserting “January 1, 2017”.
(b) MODIFICATION.—Section 108(a)(1)(E), as amended by subsection (a), is amended by striking “discharged before” and all that follows and inserting “discharged—
“(i) before January 1, 2017, or
“(ii) subject to an arrangement that is entered into and evidenced in writing before January 1, 2017.’’.
(c) EFFECTIVE DATES.—
(1) EXTENSION.—The amendment made by subsection (a) shall apply to discharges of indebtedness after December 31, 2014.
(2) MODIFICATION.—The amendment made by subsection (b) shall apply to discharges of indebtedness after December 31, 2015.
Consolidated Appropriations Act, 2016, pp. 824-25.
What does it mean for homeowners defending foreclosures?
The Mortgage Forgiveness Debt Relief Act has been one of the best things ever to happen to homeowners going through foreclosure. Without this law, once your foreclosure case concludes you may be hit with a deficiency judgment. For example, if you owe $250,000 on your mortgage but your house sells at the judicial foreclosure sale for $200,000, the foreclosing lender may (and often does) seek a deficiency judgment against you for the difference.
Because most people going through foreclosure have little money available to pay their creditors, many of these deficiency judgments are written off. When a lender “cancels” debt, they issue you an IRS Form 1099-C, and in most cases, the IRS considers this to be income. So, for a 1099-C in the amount of $50,000, to make your situation worse after losing your house in foreclosure, now you have $50,000 of extra income to report on your tax return, and without an extension of the Mortgage Debt Forgiveness Act, you would have to pay income taxes on the cancelled debt.
The same logic applies when you short-sell or obtain a deed-in-lieu of foreclosure for your house. If the bank is writing off all or part of the loan balance that you owe, accounting practices require that you receive a 1099-C for the canceled debt, and without the Mortgage Debt Forgiveness Act, you would have to pay income tax on the cancelled balance.
This won’t last forever. Don’t rely on this blog post after December 31, 2016.
Foreclosure defense attorneys wait with bated breath every year to see if Congress will extend the Mortgage Debt Forgiveness Act. The Mortgage Debt Forgiveness Act didn’t exist until 2007. Prior to 2007, you did have to pay income tax on the cancellation of debt for your primary residence. It is unlikely that Congress will extend this specific type of tax relief forever. Congress may not extend this form of tax relief into 2017. Do not rely on this blog post to think that you won’t have to pay income taxes on canceled debt for your home after December 31, 2016.
I try to stay on top of this law because it is one of the biggest questions my residential mortgage foreclosure clients have. If you stumble upon this blog post in 2017 or later, you should give me a call to see if I know what the current status is.
What does this mean for your foreclosure defense case?
The answer to that question is, as always, it depends. If you have no where to go at this juncture, your only real choice is to stay in your house for as long as you can. Even if staying in your house past December 31, 2016 results in you owing money to the IRS, owing money to the IRS is better than being homeless.
That said, start making plans now. You have 12 months to plan ahead. If tax liability is a major concern for you, work with your foreclosure defense attorney to structure a plan to finalize the case well in advance of the end of 2016. Mortgage lenders are notoriously slow turning around paperwork. The lender may not generate your 1099-C for months or years after your foreclosure case concludes. While there is no guarantee that your foreclosure defense attorney can structure your case so that you receive a 1099-C while the Mortgage Debt Forgiveness Act is in effect, at least your attorneys can try if they know this is your goal.
The importance of picking the right foreclosure defense attorney.
Just about every attorney in McHenry County, Illinois will defend your foreclosure case if you are willing to pay them money. Rather than picking a random attorney out of the Yellow Pages, you should select an attorney that stays on top of recent legislative developments in the foreclosure defense arena, has knowledge about hidden or not-so-obvious consequences of your foreclosure case, and cares about the practice. I am always happy to talk to homeowners who are facing foreclosure, and even if hiring my office is not the right fit for you, at least you will have a better understanding of the foreclosure process after speaking with me.