Mortgage Debt Relief Act (HR 3648)- Will it help you?

As more and more people are contemplating the possibility of foreclosure or a short sale on their homes, many feel "safe" that they may not owe taxes following the forgiveness of the debt by their lender(s). Be sure you do your homework, carefully. Hiring a short sale expert to help you negotiate the terms with your bank is important.

Many terms are negotiable with the lender, and you MUST know what to ask for to protect yourself from recourse, deficiency judgments or tax bills.

Further, you must know what this Mortgage Debt Relief Act really means. It is NOT the cure-all and it is not even an option for everyone. It does not encompass all "mortgage debt," so be careful. Take very careful note as to who this Act will help, and/or who it will not. If you have refinanced your mortgage, have a second, a third or if this is an investment property - you likely do not fall under the protection of this act at all.

Mortgage Debt Relief Act will save some homeowners facing short-sales or foreclosures from paying federal taxes on the "forgiven" debt. There are, however, very specific requirements:

• The mortgage is for the homeowners’ principal residence. The relief does not apply to any debt forgiveness for any vacation or investment home.
• Forgiveness is only for the "acquisition indebtedness" of the principal residence. Acquisition Indebtedness is defined as the debt used to acquire, construct or rehabilitate the home.
• No relief is available for cash-out mortgages whether the cash-out takes the form of a refinanced first mortgage, a second mortgage, a home equity line of credit or a similar arrangement.
• Exception: If the cash-out was specifically used to improve the home and the homeowner have adequate records to prove it.

Washington State: NON RECOURSE LAW

How are foreclosures and SHORT SALES taxed?

An important consideration in the results of a foreclosure or short sale is whether the debt is "recourse" or "nonrecourse". If the debt is recourse", the debtor is personally liable for the debt. If the debt is "nonrecourse", the debt is only secured by the property, and the debtor is not personally liable for the balance.

You should consult with an attorney to determine the status of your mortgage. In WASHINGTON, most mortgages are nonrecourse.

When a nonrecourse mortgage is foreclosed, the property is treated as being sold for the balance of the mortgage. This is important because the gain from a foreclosure of a principal residence may be eligible for the $250,000 ($500,000 for jointly-owned marital property) exclusion.

For non-recourse debt short sales should require the cancellation of the debt by the lender as a condition of the sale, the debt cancellation is included in the sale proceeds, like for a foreclosure.

Therefore, a "short sale" can be a viable alternative to a foreclosure for debtors with nonrecourse debt.

Are you aware of how a short sale may hurt you in the future?

Sure, this sounds opposite of what many may say. But it's the truth. A short sale is not always the right answer. Be sure you connect with a good short sale expert from the beginning.

Remember non recourse loans means in a foreclosure or short sale, the lender can NOT go after you for any further remedies, damages or deficiency. HOWEVER, tucked away into many of these short sale letters of "approval" is language that potentially change that for you. Some have language that may cause you to be liable for the deficiency. Or that they MAY reserve the right to pursue you for the deficiency balance.

So are you turning your "non recourse" debt into a collections? Possibly. Know what you are agreeing to when you complete a short sale and sign off on their approval.