According to New York Tax Attorney Shamsey Oloko, if the country goes over the fiscal cliff, the average taxpayer, and the real estate industry, may feel the pain in yet another way – debt forgiveness.
Normally, if a lender forgives a portion of a loan, the beneficiary is required to pay taxes on the forgiven portion of the loan, as it would on an income.
However, in 2007, Congress passed a law, the Mortgage Forgiveness Debt Relief Act of 2007, which allowed taxpayers to avoid paying such taxes. Thus, if a lender agrees to a short sale or agrees to take less than you owe on your mortgage, you would not have to pay taxes on the unpaid balance of the loan.
But, says, New York Tax Lawyer Shamsey Oloko, Esq., unless Congress extends it, the Mortgage Forgiveness Debt Relief Act of 2007 is due to expire at the end of 2012. Unless there’s an extension, taxpayers will have to start paying taxes on the forgiven portions of loans once again. This is clearly an unwelcome burden for the homeowner who is engaged in a short sale precisely because they are facing financial difficulties. And, banks will have a more difficult time convincing borrowers to enter into a short sale if the taxpayer has to notwithstanding pay taxes on the unpaid portion of the loan.
