The thousands of Americans who completed short sales during 2014 and had mortgage debt cancelled, got a huge 11th-hour tax break this week when the Senate extended the Mortgage Debt Forgiveness Act.
Almost 122,000 short sales closed nationwide between January and October, with an estimated average debt forgiveness of about $88,500, according to RealtyTrac. The average seller had a mortgage balance one and a half times higher than the market value of the house.
Normally, the Internal Revenue Service treats forgiven debt as ordinary income going to the borrower, taxable at regular rates.
But under an exception for forgiven mortgage that took effect in 2007, qualified borrowers that saw their debt canceled by a lender as part of a short sale, loan modification or foreclosure do not have to pay taxes on the wiped out debt.
Lawmakers averted the exemption’s expiration on Dec. 31, 2014.
The short-sale break was part of a broader “tax extenders bill” that provides a range of tax breaks. In a short sale, the homeowner agrees to sell the property, typically for a price well below what is owed to the bank. The difference between the sale price and the total amount owed can be forgiven by the lender.
Following the passage of the extenders bill, the IRS this week announced that it anticipates opening the 2015 filing season as scheduled this month.
The IRS will begin accepting tax returns electronically on Jan. 20. Paper tax returns will begin processing at the same time.
“We have reviewed the late tax law changes and determined there was nothing preventing us from continuing our updating and testing of our systems,” said IRS Commissioner John Koskinen. “Our employees will continue an aggressive schedule of testing and preparation of our systems during the next month to complete the final stages needed for the 2015 tax season.”
Those who fall under the tax break under the Mortgage Forgiveness Debt Relief Act should receive Form 1099C (Cancellation of Debt) from their lender, if the amount of cancelled debt was more than $600.