December 18, 2014

by Goldstein Law Group
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Although many government statistics point towards economic recovery, the New Jersey residential real estate market has been slow to recover. Granted, there has certainly been some gradual increases seen in the price of homes since the mortgage fiasco and real estate crash of ’08/’09. However, many homeowners still find themselves in a situation when they go to sell their home that their mortgage balance(s) exceed the fair market value of their home. As a result, they must seek short sale approval of their home from their lender(s) if they want to sell it before the market takes its sweet time to recover more. And, with some homeowners having experienced a loss in value by 25-30% or more, that may never happen in one’s lifetime. As an alternative, a seller can pursue, and must secure their mortgage lender’s consent to the sale of the home at a price that will not result in sufficient proceeds from that sale necessary to pay off their mortgage balance(s). Many lenders will, under the correct circumstances, and after reviewing the specific situation of the seller (including the seller’s finances as well as the facts surrounding the specific sale, such as the price at which it is sought to be sold as compared with a market value analysis or appraisal, and the amount of the anticipated deficiency). Assuming the borrower meets the requirements of their lender(s) and qualifies to complete the short sale, in most instances, that consent from your lender would include a cancellation or forgiveness of you, by that lender, for the balance you may have otherwise still owed on your mortgage(s) in excess of the amount the lender receives from your sale transaction. That’s the good news. The bad news that typically accompanied it was – the amount of the debt which the lender agreed to forgive or cancel was considered by our tax laws as taxable income to you! Thus, you had to pay income tax on the amount of the deficiency on your mortgage which the lender forgave or cancelled. Many sellers viewed this as a penalty to them, in effect- a slap in the face. Now, the good news!

This past Tuesday, a bill was approved by the Senate that includes, among other things, a provision that protects homeowners from having to pay taxes on the portion of their mortgage debt that may be forgiven or cancelled as part of their short sale transaction. It passed the Senate with overwhelming support: 16 against; 76 in favor. In addition, it passed in the House by a vote of 46 against and 387 in favor! There was much debate over how long this part of the tax law would be extended (it had expired at the end of 2013). After a push to extend it for two years, it only won support for a one year extension, until December 30, 2014, with the law being retroactive to transactions occurring any time earlier in 2014. If you need a real estate attorney for the closing on the purchase of sale of your home in New Jersey, whether or not it involves a potential short sale, talk to an experienced New Jersey real estate attorney at Goldstein Law Group.
Other beneficial parts of this bill included the right for a homeowner to now deduct the cost of one’s mortgage insurance premiums on one’s 2014 income tax return. This is also known as PMI. And, this deduction applies to the mortgage insurance premiums on many types of mortgages such as private mortgage insurance premiums, Rural Housing Service Guaranteed loans, V.A.Loans (issued by the Department of Veteran’s Affairs) as well as FHA loans.

Under the bill, homeowners can deduct the cost of mortgage insurance premiums on their 2014 tax forms. This tax break covers private mortgage insurance premiums as well as premiums paid on Federal Housing Administration, Department of Veterans Affairs and Rural Housing Service guaranteed loans. The U.S. Mortgage Insurers welcomed the extension. This legislation which includes tax-deductible treatment of mortgage insurance premiums applies generally for low and moderate income borrowers.

This whole concept of forgiveness of indebtedness by one’s lender is a recent phenomenon of the government’s attempt to avoid an already suffering homeowner who lost equity in one’s home from suffering the additional pain, and significant expense of yet another “punishment” adding insult to injury: that is, having to now pay income tax on the amount of the forgiven debt. Before this special legislation was passed, in response to the government’s attempt to soften the blow, taxpayers did have to pay tax on the forgiven or cancelled debt. Because of the uncertainty in 2014 until now, many homeowners were faced with not knowing what to do about a potential short sale and the prospect of paying the income tax on the forgiven/cancelled debt, and they held off from selling. This may account, in part, for the decline in the number of short sales that were recorded for last year, 2013 (there were only approximately 87,000+/- in 2013 as compared with approximately 125,000+/- in 2012).

We have seen the volume of foreclosure filings reduce since the end of the first decade of the new millennium. This can be attributed to many factors, including legislation such as this, known as the “Mortgage Forgiveness Debt Relief Act”. Other factors included the improvement of the economy generally. The first time such legislation was passed dates back to 2007. Periodically, that legislation was extended. However, the last such extension expired at the end of 2013 leaving short sale sellers in 2014 facing income taxes on that forgiven or cancelled debt – until this past Tuesday!

The attorneys at Goldstein Law Group work hard to resolve closings involving a short sale, whether from the buyer’s side or the seller’s side. Call 732-967-6777, or use the contact link on this page to request a consultation.

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