What the Mortgage Forgiveness Debt Relief Act Expiring Means for Investors

OMG! The Mortgage Forgiveness Debt Relief Act has expired! Homeowners owe the IRS more than they could ever pay. This is a catastrophe – not really.

On December 31, 2013, the Mortgage Forgiveness Debt Relief Act expired. For months prior to the expiration and immediately after, there was a rush of “experts” howling and screaming about how homeowners and the housing market were going to suffer. Well, we’re now five months into the 2014 and the sky hasn’t fallen. Were the experts wrong? For the most part, yes they were.

On December 20, 2007, President Bush signed the Mortgage Forgiveness Debt Relief Act into law. The point of the law was to provide tax relief to the millions of homeowners who would have faced regular income taxes on any forgiven debt after going through a foreclosure, short sale, loan modification, or cash for keys scenario on their primary residence. Normally, forgiven debt is taxed at the homeowner’s income tax rate. For example, let’s say your annual salary is $60,000. You bought your house for $325,000 during the anything goes days of 2005. In 2009, you still owed $300,000 but had to sell it for $200,000 through a short sale. The bank forgave the deficiency for the $100,000 you still owed. Before the Mortgage Forgiveness Debt Relief Act was passed, that forgiven debt counted as income, making your total taxable income $160,000 in 2009! The resulting $53,000 income tax bill is almost your entire year’s salary! After the Act was passed, the forgiven debt would have been waived, and you would only owe taxes on you regular income of $60,000.

You can see now why that law was a major help for homeowners during the foreclosure crisis…

So why haven’t you heard from hundreds of thousands of foreclosed homeowners who will be hit with massive tax bills in April 2015? For years the IRS has granted a forgiven debt exemption for people who are insolvent. That is to say, if you total debts are equal to or higher than your total assets (not counting IRA and 401K assets), you were never on the hook to pay income taxes on forgiven debt. The vast majority of people who have gone through a foreclosure or short sale are technically insolvent, and therefore exempt from paying taxes on their forgiven mortgage debt.

That’s not the only reason the expiration of the Mortgage Forgiveness Debt Relief Act is not a big deal. The second reason is that congress is already in the process of extending it for another two years! The bill to extend the act is expected to be passed in the fall of 2014 and to last through 2015.

So how does all of this confusion affect real estate investors? You should be able to talk with homeowners who fear a large tax bill if they sell to you through a short sale and get them to see that, most likely, they won’t owe anything due to their insolvency (Of course you should tell the homeowner to check with an accountant to be sure). If you are purchasing notes (as we suggest), you can tell underwater homeowners that you will release them from their mortgage and forgive the deficiency and they won’t have to worry about the tax bill if they are insolvent. If they aren’t insolvent, the law is most likely going to be passed later this year anyway!

As you might have seen from my previous articles, I am a major proponent of buying notes. If you have a homeowner who is willing to work with you, it is a great way to do deals with tons of possible exit strategies. We have a GIGANTIC opportunity sitting in front of us. There has never been a better time to buy defaulted notes. Banks are more willing than ever to sell defaulted notes not only because it means immediate cash in their pockets, but it also takes away the possibility of future lawsuits.

If you know of anyone with a defaulted note, you need to get in contact with my office immediately at (706)-485-0162. I have spent the last two years building up a team of experienced attorneys and fraud examiners/forensic auditors who specialize in exposing fraud committed in the mortgage process and using that fraud as leverage to negotiate the sale of notes.

We have a huge opportunity to help homeowners and do some great deals with multiple exit strategies. We finally have the leverage we need to get the banks negotiating on our terms. It doesn’t even matter if the homeowner has already been foreclosed on, we might be able to help.