Over the past couple of weeks there have been numerous news stories, both local and national, citing real estate experts who suggest that if homeowners don’t sell this year, they could face big tax consequences because the Mortgage Forgiveness Debt Relief Act (MFDRA) will expire.
If you are not familiar, the MFDRA was first enacted by Congress in 2007 and it is set to expire this year. Generally, the MFDRA allows exclusion of income realized as a result of modification of the terms of the mortgage, or foreclosure on your principal residence. It essentially allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.
But the reality is, for many Arizonans, the MFDRA has very little impact because most first mortgages are “non-recourse” loans and most seconds don’t qualify for the tax protection of the MFDRA; therefore, no matter when we sell our homes, we will not be taxed, whether it is in 2012 or 2013, irrespective of whether the MFDRA gets extended.
The IRS website lays this out for us: “a non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income.”
And, here’s the problem: whether it’s because inventories are at historic lows in the Phoenix market, or simply a tactic to get underwater homeowners to sell their homes, realtors are claiming that failure to sell an underwater home this year will result in huge tax consequences next year after the MFDRA expires.
These real estate “experts” are clearly giving self-serving information to homeowners and the media hoping to convince homeowners that they must sell this year. These realtors who tell homeowners to sell this year because MFDRA will expire are giving “tax” advice in an attempt to scare homeowners into selling their homes now. But, several of the form documents realtors use here in Arizona, force both buyer and seller to affirmatively waive any claims you have against them for both financial, legal and tax advice. So, when homeowners learn they have been duped, they have no legal recourse.
The bottom line is, you need to know what your legal rights are. Before making important financial, legal and tax decisions, make sure to speak to someone who is willing to stand behind the counsel they give you so that you can make these important decisions using accurate information.