There is a buzz within the ranks of real estate these days regarding the expiration of the MFDR (Mortgage Forgiveness Debt Relief Act) the end of this year.  Enacted in 2007,  this act  “allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.”   First, let’s remember that this act provides for tax protection on forgiven debt against  the original loan to purchase the house, or the refinancing against that original debt.

 Without a doubt, the forgiven debt tax protection allowed many upside-down owners, who’d already lost equity, the investment they’d made in their home, their good credit standing, and much more, to at least start afresh without a huge tax burden.  This translated to moving a huge wave of troubled properties to change hands, helping to  solve the real estate crisis one property at a time. 

 The days of tens of thousands of Phoenix homes languishing for lack of sellers are behind us.  Property values are moving in a positive direction.  Because of the clear improvements in the market, it is unrealistic to hope that the MFDR will be extended indefinitely.  It seems that the biggest fears about the expiration of MFDR are industry based, and originate with real estate agents who rely heavily on short sale listings, or attorneys making a living advising those sellers.

 What will this mean for upside down sellers when the act expires?   Time will tell regarding the impact to individual sellers, as well as to our Phoenix market. But even after the expiration of the MFDR,  those sellers that are insolvent (debts exceeding assets) when short selling may avoid taxation on the forgiven debt.

 If you owe more than your home is worth, should you rush to sell this year?  Each situation is unique, and the process is complicated.  You may be surprised to find out what your home would sell for these days (CoreLogic: Phoenix leads the nation in home value gains).  If you decide to  short sell, employing the advice of a tax and or real estate attorney is paramount, and will become even more important post MFDR.  Please feel free to call or email to discuss your situation.