California borrowers have been given one more year of grace to short sell their homes without having to pay income taxes on the forgiven debt.
As part of the "fiscal cliff" resolution, the Mortgage Forgiveness Debt Relief Act (MFDRA), originally set to expire on Dec. 31, 2012, was extended one year.
Normally, homeowners who short sell their houses must file the forgiven debt as taxable income. In many cases, individuals are in no position to pay those taxes and are forced to file for bankruptcy. That process can be damaging to homeowners and harmful to our housing market.
MFDRA excuses the taxes owed on the forgiven debt. California homeowners were put in a poor position in 2012 as they tried to short sell their homes before MFDRA was set to expire. Many were not able to sell their homes. The extension comes as a breather for struggling owners who need more time to short sell their property.
Although the extension of MFDRA has been passed on the federal level, the state has yet to adopt the extended measure. Senate Bill 30 will extend the act in California for one more year if it passes, according to a release from the California Association of Realtors (CAR). The measure would be retroactive to Jan. 1, 2013.
MFDRA does a world of good for homeowners caught beneath the pieces of the housing-market crash.
Declining prices and a market spike are likely to follow the extension as homeowners take advantage of the grace period and put their homes up for sale.
Lee is Board President of the San Diego Association of Realtors.