The Mortgage Debt Forgiveness Act was set to expire at the end of 2015, and without an extension, any mortgage forgiveness achieved in a short sale would have been counted as income for homeowners whom banks allowed to sell their homes for less than the amount of their mortgage during 2015. But an extension to the Mortgage Debt Forgiveness Act was included in the fiscal 2016 federal appropriations and tax relief bill, which passed both the House of Representativesand the Senate on Friday.
The bill is now awaiting the signature of President Obama, who reportedly will sign the bill into law on Friday, meaning that borrowers who had short sales in 2015 are about to be able to breath a little easier.
This is not the first year that the extension of the short sale tax break has come right down to the wire. Last year, President Obama signed the 2014 version of the short sale tax break on Dec. 29.
But what’s different in this year’s version of the short sale tax break applies not only to short sales that took place in 2015, but it also extends the short sale tax break to cover any short sales that take place in 2016 as well.
Previous extensions of the short sale tax break only covered short sales during the previous year, leaving many homeowners wondering if they were going to get stuck with a massive tax bill.
While last year’s short sale tax break was in Congressional limbo, a report from RealtyTrac estimated that in the first three quarters of 2014, there were more than 170,000 short sales representing a mortgage debt forgiveness of $8.1 billion total.
The average short sale has a mortgage forgiveness of about $75,000, which if the tax break expired would be counted as income.
RealtyTrac also estimated that the potential taxes on the average short sale to be $22,114, which would have brought the total tax liability to $2.7 billion.
But that didn’t happen last year, and it’s now one step away from not happening in 2015 or 2016.