Homeowners that are interested in loan modification or short sale should be familiar with the expiration of the mortgage debt cancellation provision, which ends Dec. 31, 2012. The mortgage debt forgiveness issue is only one of approximately 60 expiring tax provisions that Congress appears unable to extend prior to its recess for the November elections. Congress is pushing the extension of any expiring tax provision to the lame duck session, along with any increase in the debt ceiling, and any serious attempts to prevent the mandatory budget cuts agreed to during last year’s debt ceiling deal.
California’s tax treatment of mortgage debt relief income generally aligns with federal law, and both the California and federal laws are set to expire at the end of 2012. For debt forgiven on a loan secured by a “qualified principal residence,” borrowers are exempt from both federal and state income tax consequences, but only until Dec. 31, 2012. The existing federal exemption is for indebtedness up to $2 million, whereas the new California exemption is for indebtedness up to $800,000 and forgiven debt up to $500,000.
However, these tax breaks apply only to debts discharged from 2009 through 2012. It may be that Congress will take action to extend the federal exemption before year’s end, but we will have to wait and see. If the federal law is extended, it is likely that California would follow in due course, as in the past, but it is not guaranteed. The last time the federal tax exemption was extended, California did not conform its tax law until well into the next year.
If you’re a homeowner thinking about loan modification or short sale, speak with your legal counsel or a tax advisor about the impact of the expiration of these laws and their potential tax liabilities, including the applicability of other exemptions from debt relief income tax.
Responsible Homeowner Refinancing Act
Although interest rates are at record lows, only a fraction of homeowners are able to refinance, mainly because they are underwater. The Los Angeles Times reported this week that a whopping 69 percent of mortgages at the end of the second quarter had interest rates of 5 percent or higher and about 33 percent of them had rates above 6 percent. That’s why VLG is praising California Sen. Barbara Boxer and New Jersey Sen. Robert Menendez for reviving a measure that would allow millions of homeowners to more easily refinance their mortgages at lower rates.
The bill, known as “The Responsible Homeowner Refinancing Act of 2012,” was first introduced in May and would streamline and align the refinance processes of Fannie Mae and Freddie Mac and make it easier for homeowners who are current on their mortgage payments, but who have been previously unable to refinance, to finally take advantage of record low interest rates. Responsible homeowners who can refinance will avoid foreclosure and have more money in their pockets. Fannie Mae and Freddie Mac will see fewer foreclosures, and the housing market can continue its recovery.
Protecting Military Servicemembers From Foreclosure
Starting January 1, 2013, the existing California protection for a servicemember against foreclosure by a mortgage lender during the period of military service or within three months thereafter, has been extended to nine months thereafter. Exceptions apply to sales made by agreement or court order. This law applies to mortgage loans originated before a servicemember’s period of military service for which the servicemember is still obligated. The nine-month period mirrors the foreclosure protection under the federal Servicemembers Civil Relief Act. However, President Obama recently signed into law the federal Honoring America’s Veterans and Caring for Camp Lejeune Families Act which extends, from February 2, 2013 to December 31, 2014, the foreclosure protection to one year after the period of active duty. Source: AB 2475 and H.R. 1627.
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