We spoke with Thomas Carrozzo of the Stephen Golden Law Firm for an update on Niko Black's case. He also spoke to us about the Mortgage Forgiveness Debt Relief Act. For more on the act itself, check out this link. View Document
Here is more info on how the act affects you...
Before the housing downturn hit, "forgiven debt" on home mortgages could be taxed as income. For instance, if your lender lopped $50,000 off what you owed (a type of loan modification called principal reduction), if you short-sold the property for $50,000 less than your mortgage or if your lender foreclosed on a property worth $50,000 less than you owed, the $50,000 would be treated as income, adding up to a potential big bill for state and federal taxes.
But with millions of struggling homeowners in such situations, both the Congress and the California Legislature passed bills to exempt forgiven home debt from taxes.
But now the Mortgage Forgiveness Debt Relief Act of 2007 is due to expire on Dec. 31. The election-year Congress, already famously fractious, is not expected to act on it in 2012, although industry experts hope it could get extended next year.
"When the law expires at the end of this year, a lot of people could get hurt," said Eva Rosenberg, an enrolled agent who runs TaxMama.com in Northridge.
Even if the act eventually gets renewed, it doesn't cover all homeowners.
"It applies only to the mortgage you originally got to acquire the home or to a refi used to improve the home," said Stephen Moskowitz, a tax attorney in San Francisco.
Homeowners who did cash-out refinances and used the money for any other purpose than fixing up their house could still be on the hook for forgiven debt. The legions of people who refinanced during the boom days, using their homes as piggy banks, are not covered by the act, for instance.
For people in that situation - and for everyone if the act does not get renewed - one way to still avoid taxation is the insolvency exception, Moskowitz and Rosenberg said.
"Insolvency means your debts exceeded your assets the day before and the day after the foreclosure" or short sale or principal reduction, Moskowitz said.
"For example, assume that the day before the foreclosure (or other debt forgiveness), your home's fair market value was $1 million, your mortgage was $2 million and your other debts, such as credit cards, were $8 million. Now we remove the asset and the liability of the house - and your debts still exceed your assets, so you are insolvent."
Bankruptcy is also an option to dissolve the tax obligation, he said.
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