Las Vegas Underwater Principal Reductions Might Incur Taxes in 2013
In February 2012, the U.S. government, along with 49 states, entered into an agreement with several large banks that required the banks to restructure $26 billion worth of underwater mortgages nationwide. The $26 billion at the time was much too small to cover the near-$700 billion in negative equity that Americans had, and only $17 billion actually went to distressed mortgages. The remainder was dedicated to other purposes, such as refinancing, compensating victims of wrongful foreclosure, and compensating governments. Although the government retained the right to pursue banks for committing mortgage fraud, it has not done so.
Meanwhile, many underwater homeowners have been trying to avail themselves of the settlement funding to obtain principal write-downs on their mortgages. Normally, people who accept mortgage write-downs must report any forgiven amount as income to the IRS and pay income taxes on it. However, thanks to a 2007 law that has been extended, the Mortgage Forgiveness Debt Relief Act, which removes the tax liability on forgiven mortgage income for primary residences only.
However, the extensions are almost up. According to an article on Salon, the act expires at the end of this year, if it is not extended. Oregon senator Jeff Merkeley was quoted, stating, “This has the effect of pulling people up with one hand, and hitting them in the face and knocking them over the cliff with the other.”
The problem is that a large write-down can hurl homeowners into the highest income tax brackets when they still lack the income to pay it. The tax bill on six figures of forgiven debt could be in the tens of thousands of dollars.
Whether the law will be extended for at least another year remains to be seen, but for those whose mortgage is held by one of the banks that agreed to the settlement, a principal write-down is worth pursuing before the end of the year. For those who have different mortgagees or are otherwise ineligible, then talking with a Las Vegas bankruptcy lawyer is a wise idea. Filing bankruptcy can eliminate non-mortgage debt, and liens from underwater second or subsequent mortgages can be stripped in Chapter 13.
For more questions about bankruptcy in Las Vegas, please feel free to contact an experienced Freedom Law Firm Las Vegas bankruptcy attorney for a free initial consultation. Call us at 1-702-803-9251 to set up your free consultation.