Can a Mortgage Company Wait Until After the Forgiveness Act Expires?
Under normal circumstances, when a creditor cancels a debt you owe, the Internal Revenue Service counts the debt as income if it is more than $600. However, in 2007 the federal government passed the Mortgage Forgiveness Debt Relief Act. This act allows forgiveness of debt and tax obligation for an individual who received a cancellation of debt on his primary residence. The act is set to expire in 2012. Technically, a lender can wait until after the expiration date to approve a short sale. However, waiting serves no purpose for the lender unless problems exist with short sale. Home owners should understand the Mortgage Forgiveness Debt Relief Act to fully take advantage of its benefits.
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Nature of a Short Sale
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A short sale occurs when the lender accepts less than amount of the outstanding mortgage as payment in full. A lender forgives the difference between the outstanding mortgage and the amount accepted. Short sales require the lender’s approval. A lender considers accepting a short sale from the home owner once the mortgage is delinquent. A lender benefits from accepting a short sale because it avoids foreclosing on the home and losing more money during and after the foreclosure process. A home owner benefits from a short because he avoids losing the home and receiving such a devastating negative mark on his credit report.
Debt Forgiveness Act
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A home owner can only benefit from the Mortgage Forgiveness Debt Relief Act if the short sale occurs on his principal residence. Two million dollars serves as the maximum amount forgiven under the Mortgage Forgiveness Debt Relief Act and $1 million dollars for married tax payers filing separately. When a lender forgives your debt, it should send you Form 1099-C, which states the amount forgiven. Using the information from Form 1099-C, you must file Form 982 for the IRS to forgive the debt and not include it as taxable income.
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Reasons for Short Sale Delay of Rejection
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In most cases, a lender will not purposely delay a short sale to wait for the expiration of the act, but can rightfully delay or refuse a short sale if the home owner cannot meet its conditions. Some common reasons for a delay or rejection include a short sale price considered too low, the home owner not experiencing a hardship or the property is already several stages into the foreclosure process. Short sales take months to complete and can experience significant delays. If a home owner cannot sell his property by December 31, 2012, he is ineligible for debt forgiveness.
Exceptions to the Act
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You cannot write off the debt forgiven for a second home, credit cards or student loans under the Mortgage Forgiveness Debt Relief Act. It also does not include money lost after a home goes through foreclosure. However, other options exist to forgive cancelled debt. Borrowers may receive forgiveness if considered insolvent, which means that your liabilities exceed your assets. Filing for bankruptcy can also result in the forgiveness of most debt.
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