Many are beside themselves while others have expressed a sense of panic to me regarding the expiration of the Mortgage Debt Relief Act and their decision to do a short sale. The law, or otherwise termed grossly generous entitlement, is over. I do not expect a retroactive continuation but who knows, anything is possible. The question is “What do you do now?”. Taking no action just because the environment has changed may not be a good strategy.
The answer in short is don’t panic. The first place you should turn to is “Insolvency”. There is a definition for this condition. The IRS is compassionate and the government does not want to drive people into the ground financially when they have fallen on hard times. It is much better for the economy and the IRS to get people back to constructive status as soon as possible. For this reason the law allows for a provision called “Declaration of Insolvency”. When this declaration is made and submitted with your 1099C from your lender(s) outlining your unpaid and/or forgiven debt you will not owe additional taxes. You can go to http://www.irs.gov/ and look this up. You will find a form and a basic computation sheet.
In short, you simply add up all of your current assets and compare them to all of your debt. If you meet the parameters of the declaration then you have beaten the system. Please be aware that many tax advisors and even accountants may not be familiar with this process but it is clearly in the law.
In spite of the problem, or how your lender may have contributed to getting you in an affordability bind with an Interest Only loan etc., always focus on the solution and stay positive. Don’t let a tax issue stall your decision making. Take action and stay focused on solving your underwater mortgage problem. Any tax related issues are not going to bury you financially. But an unresolved mortgage problem left unchecked could clearly consume you emotionally and financially. There are several ways to mitigate the tax element. The Declaration of Insolvency is a good start.
Blogging from the front line of the housing crisis.
George Omilan
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