PHOENIX -- A big deadline is looming that could affect thousands of valley homeowners.
The Mortgage Debt Relief Act is set to expire at the end of this year.
The act had allowed homeowners who sold their homes in short sales, to avoid paying taxes on mortgage balances that had been forgiven.
That policy has been in effect since 2007, but it could soon come to an end.
CPA Bob Hockensmith sat down with Good Morning Arizona’s Kaley O’Kelley to explain what it all means for homeowners.
“Once a bank or a mortgage company takes back a house, the bank can’t come after you for the excess mortgage that they’d forgiven,” he says.
That’s what’s called the “anti-deficiency rule”. But Hockensmith says the tax rule is something entirely different.
“From 2007 through 2012, if you had your debt relieved, you didn’t have to pay taxes on that debt relief,” Hockensmith tells us. “So if you owed $200K and walked away from that house, you don’t pay taxes on the $200K.”
But now, the Mortgage Debt Relief Act is coming to an end Dec. 31.
“So, January first, if you have a short sale, if you have a foreclosure, if you have a loan modification where they knock down some of the principal, and now you owe less than you paid for the house, now you’re going to have to pay taxes on it.
Taxes are also going up next year, so you could get hit twice.
The Debt Relief Act does not apply to rental properties and commercial properties.
So if you’re a homeowner in trouble, what steps should you take to protect yourself?
Experts advise talking to an accountant immediately. “See somebody as soon as possible,” Hockensmith cautions. “Most of the time a short sale or foreclosure can take six to nine months to go through.”
There’s still a chance that Congress may extend the law. Lawmakers could vote on it next year and put the act back into effect retroactively to the first of the year.