Realtors hope the Federal Mortgage Forgiveness Act will be extended this year

Q: Did Congress extend the Federal Mortgage Forgiveness Debt Relief Act of 2007? I have a rental property listed for a short sale in Las Vegas that (a loan service company) has approved, and I am concerned about the debt forgiveness tax consequences. Would it be better to request a deed in lieu or allow the property to foreclose? Any advice and direction you can provide would be greatly appreciated.

— Paul, Las Vegas

A: A deed in lieu (as it’s often called) and a foreclosure have similar tax consequences. The deed in lieu of foreclosure saves the bank from going through the foreclosure process but adds costs to what you could owe the bank should it decide to pursue you for the unpaid amount owed on your mortgage loan.

As for your question about a possible extension of the federal Mortgage Forgiveness Debt Relief Act of 2007, the answer, as of this writing, is not yet.

Based on what I hear from our legislative experts at the Greater Las Vegas Association of Realtors and with our state and national counterparts, I remain hopeful that Congress will vote at some point this year to extend that act for another year or two.

We received good news on that front in April when the Senate Finance Committee passed a bill out of committee to extend the act. Of course, we’re a long way from the finish line. The legislation still needs to pass the full Senate and House of Representatives before distressed homeowners across the country can enjoy the reduced tax burden the act allows.

For now, we’ll have to wait to see what members of Congress do, whether they make it retroactive to the beginning of 2014 and whether lawmakers vote to extend the act through 2014 or 2015 or even beyond.

In case you’re not familiar with the issue, which has generated more questions than any other topic I’ve written about this year, the Mortgage Forgiveness Debt Relief Act expired Dec. 31.

Since then, Nevada’s congressional delegation, the National Association of Realtors and others have been encouraging lawmakers to extend the act.

That uncertain situation has added stress to our housing market. Southern Nevada was hit harder than most by the downturn in the housing market a few years ago. Even though we’re seeing fewer short sales in recent months, they still are a fairly significant part of our local housing market, making up about 12 percent of all existing Southern Nevada home sales as recently as April, according to GLVAR.

A short sale occurs when a lender agrees to accept less than what the borrower owes on the mortgage when the borrower sells the home. During the Great Recession, thousands of Nevadans turned to short sales as a more favorable alternative to losing their homes to foreclosure. Short sales became especially common in the Las Vegas area, where they accounted for a peak of 34 percent of all existing local home sales back in June 2010.

The act was designed to help such distressed homeowners, primarily by helping them avoid a big hit on their federal income taxes.

If Congress does not extend the act retroactively, I expect to see fewer short sales this year. That’s because any amount of money a bank writes off in agreeing to sell a home as part of a short sale starting in 2014 might become taxable when sellers file their federal income taxes.

Meanwhile, people in that situation should consult an accountant to find out what’s best for them and how a short sale and the debt that might or might not be forgiven on their income taxes might affect them.

Please keep sending your real estate questions to me at ask@glvar.org so I can answer them in future columns.

Heidi Kasama is the 2014 president of the Greater Las Vegas Association of Realtors and has been a local Realtor for more than 11 years. GLVAR has more than 11,000 members. Email questions to ask@glvar.org. For more information, visit www.lasvegasrealtor.com.