While home prices across the country have seen a steady increase for the first time in nearly six years, there is a looming storm on the horizon. For the many Americans hoping to take advantage of the Mortgage Debt Relief Act of 2007, time is winding down. Unless congress comes in and extends the act, it is set to end on December 31.
The Mortgage Debt Relief Act was signed into law in 2007 by President George W. Bush as a way of offering underwater home owners the chance to short sale their homes and receive a break from lenders.
Essentially, the act helps people who find themselves with large amounts of mortgage debt and no way to get out. The answer, under the act, is to perform a short sale.
An example of this would be a homeowner who purchased a home at $350,000 in 2004. Say the homeowner then took out a mortgage for $325,000. The problem is that the price of real estate has gone down and the value of the home is now estimated to only be $225,000. Essentially, the homeowner has a mortgage debt of $100,000. The Mortgage Debt Relief Act states that this homeowner can sell the home for fair market value ($225,000) as a short sale and give the proceeds to the lender. The lender is then required to forgive the rest of the debt ($100,000).
What the End Means
The end of the Mortgage Debt Relief Act means this is no longer an option. Instead, the homeowner mentioned in the example above will be required to pay taxes on the $100,000 that was forgiven. The IRS will actually charge the homeowner with income taxes on this amount.
This decision comes as bad news for many homeowners looking to take advantage of a short sale. The only advice is to hurry up and expedite the process before the New Year is ushered in.