Sunday, September 23, 2012

IRS Insolvency Clause Provides Reprieve for Expiring ... - Debt Advice

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Bellevue, WA (PRWEB) September 19, 2012

Home sellers and real estate agents who are concerned about the upcoming expiry of the federal Mortgage Debt Relief Forgiveness Act still have options for avoiding a tax bill from the IRS, according to Seattle Small Sales, Inc.

With the principal amnesty program set to expire on Dec. 31, 2012, the Bellevue, Wash., team of legal, tax and real estate professionals is assuaging fears that sellers will miss a valuable tax break if their small sales do not close by year end.

This looming deadline is instigating a surge of small sales, clarifies Ross Kilburn, who notes that small sales increased 25 percent nationwide in the first quarter of 2012 over the previous year. What most homeowners and many brokers do not realize is that the IRS offers several non-expiring exemptions that allow sellers to circumvent the income tax assessed on forgiven debt.

An estimated 11 million Americans are underwater on their mortgages, carrying nearly $ 700 billion in negative equity as they try to ride out the recession. With one in every five homes worth less than is owed, the U.S. government passed the Mortgage Debt Relief Forgiveness Act in 2007, and then renewed it in 2009, to help homeowners recover from the economic crisis.

Prior to the Mortgage Debt Relief Forgiveness Act, the IRS taxed most forgiven debt as income. Under the current laws, the Act temporarily suspends this penalty when a lender absolves a customers mortgage debt. In order to qualify for the federal relief program, underwater mortgage holders must demonstrate extreme financial hardship, whether from a layoff, retirement or unexpected medical costs. Up to $ 2 million of debt can be forgiven by lenders.

Although the Mortgage Debt Relief Forgiveness Act expires at the end of this year, many underwater homeowners who small sale their homes will still be able to use the insolvency clause to avoid paying income taxes. In order to avoid paying taxes on discharged debt under the insolvency clause, the total amount owed to all creditors must be greater than the honest market value of all the homeowners assets. Liabilities, such as mortgage debt, credit card debt, student loans and vehicle loans, are balanced against assets like the home, vehicles, jewelry, artwork, bank account balances and retirement savings.

If a borrower is insolvent, the discharged debt is not taxable, up to the amount of the insolvency. For example, if a seller has a combined debt of $ 400,000 and assets totaling $ 145,000, then up to $ 255,000 of debt can be forgiven without being taxed. Since any absolved principal above this amount brings the seller back to financial solvency, the balance beyond $ 255,000 is taxable.

This overlooked insolvency exemption has the potential to help hundreds of thousands of homeowners across the U.S. who currently don?t have access to this vital information, praises Dean Guske, a CPA based in Bellevue. Kudos to Seattle Small Sales, Inc. for spreading their knowledge widely.?

For more information about Seattle Small Sales, Inc., log on to http://www.SeattleShortSales.com or call (800) 603-3525. Seattle Small Sales, Inc., offers no-obligation, no-fee consultations to homeowners and real estate professionals as well as an assortment of small sale resources on its website.

About Seattle Small Sales, Inc.

An accredited member of the Better Business Bureau, Seattle Small Sales, Inc., has saved more than 500 distressed Puget Sound homeowners in excess of $ 65 million in mortgage debt. In addition to negotiating debt settlements with mortgage lenders to prevent foreclosures, the organization works with various types of lien holders, including the IRS and HOA, as well as utility and credit card companies, to preserve clients credit.

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Source: http://debtadvice.only-the-news.com/irs-insolvency-clause-provides-reprieve-for-expiring-mortgage-debt-relief-forgiveness-act/

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