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Mortgage Forgiveness Debt Relief Act of 2007

Amends the Internal Revenue Code to exclude from gross income amounts attributable to a discharge, prior to January 1, 2010, of indebtedness incurred to acquire a principal residence. Limits to $2 million the excludable amount of such indebtedness. Reduces the basis of a principal residence by the amount of discharged indebtedness excluded from gross income. Disallows an exclusion for a discharge of indebtedness on account of services performed for the lender or any other factor not directly related to a decline in the value of the residence or to the financial condition of the taxpayer. Sets forth rules for determining the allowable amount of the exclusion for taxpayers with nonqualifying indebtedness and taxpayers who are insolvent.

Extends through 2012 the tax deduction for mortgage insurance premiums.

Sets forth alternative tests for qualifying as a cooperative housing corporation for purposes of the tax deduction for payments to such corporations. Qualifies a corporation if: (1) 80% or more of the total square footage of the corporation’s property is used or available for use by its tenant-stockholders for residential purposes, or (2) 90% of the corporation’s expenditures are for the acquisition, construction, management, maintenance, or care of its property for the benefit of the tenant-stockholders.

Allows members of a qualified volunteer emergency response organization (i.e., an organization that provides firefighting and emergency medical services) an exclusion from gross income for state and local tax benefits and for certain payments for services. Terminates such exclusion after 2010.

Allows certain full-time students who are single parents and their children to live in housing units eligible for the low-income housing tax credit provided that their children are not dependents of another individual (other than a parent of such children).

Allows a surviving spouse to exclude from gross income up to $500,000 of the gain from the sale or exchange of a principal residence owned jointly with a deceased spouse if the sale or exchange occurs within two years of the death of the spouse and other ownership and use requirements have been met.

Increases the penalty for failure to file a partnership tax return and extends from five to 12 the number of months in which such penalty may be imposed. Limits disclosure of tax return information that includes individual taxpayer identify information.

Imposes an additional penalty on S corporations for failure to file required tax returns.

Amends the Tax Increase Prevention and Reconciliation Act of 2005 to increase the estimated tax payment due in the third quarter of 2012 for corporations with assets of at least $1 billion.

Deficiencies

When a homeowner buys a house they sign two documents: A promissory note - this is a personal guarantee to pay the lender the amount borrowed, and a mortgage or trust deed - the lien against the real property, and secures the promissory note. The Deficiency (Not Deficiency Judgment) is the difference between the amount owed and the short sale approved sale amount. A deficiency by itself is unsecured and is governed by the state law statute of limitations.
 
The Deficiency Judgment is the end result of a court case. Meaning the homeowner has been sued (foreclosure) and has lost. A judge then has to rule and issue the judgment, hence "Deficiency Judgment"

This is good for 20 years!
 
Why someone would want to avoid foreclosure is as follows:
 
The seller will still have a deficiency of whatever they owed versus how much the bank sells the property for. In addition, they will be responsible for all attorney cost, HOA fees, taxes, and insurance the bank pays until they can liquidate the property through a sheriff sale or as an REO (Bank-Owned). If the property doesn't sell at the sheriff auction it can take up to 12 months to become and REO, in which the lender will issue for the deficiency and then file a civil suit for the total loss the incurred.
 
Tax Liabilities
 
If you have owned and used the home as your principal residence for periods totaling at least two years during the five year period ending on the date of the foreclosure, you may exclude up to $250,000 (up to $500,000 for married couples filing a joint return) from income or they may insolvent.
 
Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you.You are insolvent when your total debts are more than the fair market value of your total assets. All details covered here http://www.irs.gov/pub/irs-pdf/p4681.pdf
 
Example:

If you have owned and used the home as your principal residence for periods totaling at least two years during the five year period ending on the date of the foreclosure, you may exclude up to $250,000 (up to $500,000 for married couples filing a joint return) from income.  If you do not qualify for this exclusion, or your gain exceeds $250,000 ($500,000 for married couples filing a joint return), report the taxable amount on Schedule D, Capital Gains and Losses.

In this situation, the borrower has a tax-free home-sale gain of $30,000 ($200,000 minus $170,000), because they owned and lived in their home as a principal residence for at least two years. Ordinarily, the borrower would also have taxable debt-forgiveness income of $20,000 ($220,000 minus $200,000). But since the borrower’s liabilities exceed assets by $20,000 ($250,000 minus $230,000) there is no tax on the canceled debt.

Short Sale Deficiency Balances - What is it and How Much Time Does My Bank Have to Sue?

When an underwater home is sold in a short sale or a foreclosure, the greatest concern is almost always over the remaining mortgage balance owed by the homeowner (known as a "deficiency balance") and how long the lender has to try to collect it.  When a property is sold in short sale, generally speaking, the deficiency is the difference between the total debt owed on the mortgage and the sale price.  In foreclosure, the deficiency is, generally speaking, the difference between the total balance and the fair market value of the property on the date of the foreclosure auction.  Obviously, "fair market value" is a very subjective term in this situation, and banks do everything possible to show the lowest possible fair market value of property after foreclosure in order to maximize the homeowner's deficiency amount. 

One of the best opportunities to negotiate or settle the entire balance of a mortgage loan is during short sale negotiations.  Even though it is not always possible to settle a deficiency balance through a short sale, a short sale typically produces a smaller overall deficiency balance, and always produces a more specific deficiency balance.  Among other reasons, this is because it can take years for a lender to foreclose, during which time default interest, charges and attorney fees continue to accrue on the underlying debt at a fairly significant rate.  In addition, the sale price for a private property in short sale is usually higher than the value of the property to the bank in foreclosure. 

The most common question homeowners ask is: "How much time does the lender have to come after me for the deficiency?"  The answer is in the statute of limitations, which is five years in Florida.  But, five years from what date?  Many people think it is five years from the date they stop making mortgage payments.  This is not true.  A bank cannot even sue a homeowner to obtain a deficiency judgment until after the deficiency amount has been determined. 

Depending on which route the borrower has elected to take, the five year statute of limitations begins to run either (a) from the date the property is voluntarily sold in a short sale or (b) from the auction sale date in a foreclosure.  In other words, the bank has five years from the date of any sale, be it voluntary or through foreclosure, to sue the borrower for the balance owed on a mortgage debt.  And, if the bank gets a judgment against the borrower following a successful foreclosure, the judgment can be collected for 10 years and renewed for one additional 10 year period. This means that a borrower could be haunted by a defaulted mortgage for more than 25 years.

One of the greatest advantages to a short sale (in addition to better opportunities to negotiate the deficiency balance) is that, generally speaking, a short sale will start the clock on the statute of limitations for the bank to sue for the deficiency balance much sooner than a foreclosure, which can take years to complete. 

For these reasons, among many others, completing a short sale generally produces a better result than a foreclosure over the long term.  However, any borrower should consult with a real estate attorney before choosing any course of action, as there are always exceptions to any general rule.  

Written by Berlin-Patten, PLLC. 3/2012