In 2021, the government created the Mortgage Forgiveness Debt Relief Act. This allowed struggling homeowners to be forgiven for income taxes on foreclosure, short sale and principal reduction. However, this tax break is set to expire at the end of the year if Congress doesn’t extend it.
“People trying to do short sales are freaked out about it,” real estate agent Amy Torkelson told CNNMoney. “They’re telling me they’ll do whatever it takes to close by the end of the year.”
Many mortgage borrowers will be affected by the expiration of the tax break, as the source reported there are roughly 50,000 homeowners who go through foreclosure each month. Short sales have also become increasingly popular. However, those who have the debt incurred in foreclosure would still not have to pay taxes under the act should it be extended. Also, those who are insolvent wouldn’t have to pay either. For others, the tax break has saved them thousands of dollars. If it expires, they may be forced to take out a cash advance loan to cover the costs they will face.
For example, under the act, if you sold your home for $100,000 but owed $150,000, you didn’t have to pay income taxes on the difference. If the act expires, you would be required to pay taxes on the $50,000 difference in the sale, according to CNNMoney. For someone in the 25 percent tax bracket, the income tax on the sale would total $12,500. With financial hardship forcing them into foreclosure, the odds are that they will likely not be able to pay the high amount in taxes.
Other Tax Breaks People Can Take Advantage Of
If people lose this tax break, there are ways that they can lower their tax bill. Certain charitable donations can be deducted from your taxes. If money or goods are donated during the year to a qualified organization, the fair market value of the contribution can be deducted.
Additionally, you may be able to deduct medical and dental expenses. Those that qualify include expenses for diagnosis, cure, mitigation, treatment or prevention of disease. Typically, costs of physicians, surgeons, dentists and other medical practitioners are included, according to DailyFinance. Other expenses that may qualify are healthcare insurance premiums and the cost of traveling to and from your appointments.