You may be familiar with the $25 billion foreclosure deal that the five major banks reached with attorneys general in 49 states‚ including California‚ aimed at righting foreclosure abuses perpetuated by these large financial institutions.
What our Los Angeles foreclosure lawyers want to make you aware of‚ however‚ is that if you qualify to receive restitution‚ failing to act before the end of this year could mean huge tax burdens.
That’s because the Mortgage Debt Relief Act of 2007 expires at the end of this year – unless lawmakers work to do something about it.
The way it basically works is this: If you borrow money from a lender for a mortgage and then that lender later cancels that debt and considers it forgiven‚ you would ordinarily have to count that forgiven debt as income on your taxes. That means that if you have a home that is only worth $200‚000 but you owe $300‚000 on it and the bank cancels that $300‚000 debt‚ you have to pay taxes on that $100‚000 as if it were earnings.
However‚ the Mortgage Debt Relief Act freed underwater homeowners of that obligation when the debt acquired had been used to purchase‚ build or substantially improve your principal place of residence. The maximum amount you can qualify for is $2 million.
It also applies to short sales as well as certain loan modifications that reduce the principal balance – the type of modifications that have been found to be the most effective at helping people stay current on their payments and avoid default and foreclosure.
But the expiration of this act will mean those who take the banks up on their debt forgiveness deal could face a tax burden that very few Americans – particularly those struggling with foreclosure and other debt – can afford.
It’s absurd considering that these are the same homeowners who have been kicked around by the reckless and fraudulent practices of the lending banks for a number of years. Now‚ they face being slapped with a huge tax bill they likely will have no way to pay.
A Senator from Oregon‚ who supports extension of the act‚ said that a failure to do so would amount to helping people up with one hand then smacking them back down with the other.
Up until now‚ banks had been extremely reticent to offer principal reductions because it meant they would have to take an immediate loss on their books. Even if in the long-term‚ it gave homeowners the opportunity to fulfill their loan obligation‚ they still didn’t want to do it because of that loss. Plus‚ mortgage servicers also get a cut of that principal balance‚ so they never felt it was in their interest either.
With the mortgage settlement agreement‚ the banks have to offer at least $10 billion in principal payments across the country. It’s considered their sanction for using fraudulent means to foreclose on homes.
So for example‚ let’s say a family makes about $33‚000 a year. They were roped into a home that was worth less than what they agreed to pay for it (like so many others) and the bank is now offering them a $100‚000 principal reduction. This sounds like great news – until you hear that the additional tax burden on this would be somewhere in the neighborhood of $21‚000.
For someone on unemployment or struggling to feed their family‚ this would prove financially ruinous.
There are currently two efforts underway to extend the Act so that this doesn’t happen‚ but they need to act soon‚ and there is no guarantee they’ll be successful.
In the meantime‚ if you have an underwater home and believe you may be eligible for a principal reduction or some other form of mortgage debt relief‚ contact our Los Angeles foreclosure defense lawyers and apply now.
If you are facing foreclosure in Los Angeles‚ contact Cal West Law to schedule your free consultation. Call (818) 446-1334.
Underwater homeowners face a tax time bomb‚ By David Dayden‚ Salon.com