Party Like its 2007!
The President’s Administration has recently touted the economic recovery that has taken place over the past 6 years. Contrary to this desired reality, in perhaps an acknowledgement that the housing market has not yet full recovered, the President signed the Protecting Americans from Tax Hikes Act (or “PATH” Act) into law in December 2015. One key part of the PATH Act was the extension of The Mortgage Forgiveness Debt Relief Act of 2007 through the end of 2016.
Prior to 2007, when a homeowner experienced a foreclosure, short sale, deed in-lieu of foreclosure, or even a loan modification, the homeowner would get hit with a tax bill on any canceled debt caused by the phantom income. Under relevant tax laws, when a creditor cancels this type of debt (as well as other debts such as credit card and vehicle debt), it is obligated to report the amount of canceled debt directly to the Internal Revenue Service via what is called a 1099-C tax form. In effect, the 1099-C acts to report to the Internal Revenue Service the amount of canceled debt as income to a taxpayer. A taxpayer would have to then pay taxes on this income.
Given the volume of foreclosures, short sales, deeds in-lieu, or loan modifications that occurred during the Great Recession, President George Bush signed a law in 2007 to protect homeowners who had lost their primary residence from the impact of such canceled debt. This type of relief also extends to canceled second mortgages and equity line debt that were attached to a primary residence.
Given that the extension of this law occurred at the very last minute, it is unlikely that this law will be extended beyond 2016. If you believe that time is not on your side as it relates to a issue concerning a foreclosure, short sale, deed in-lieu of foreclosure or even a loan modification, it is important that you discuss your legal options with the law firm of Grigaltchik & Galustov, P.A., at (904) 738-8398.