Underwater Homeowners Could Face Extra Tax Burden in 2014

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Struggling homeowners could be hit with an unexpected tax bill in the new year.

A law that spared people who owe more than their homes are worth from being saddled with extra taxes when their banks provide mortgage relief is expiring this week. Congress hasn’t extended it.

Underwater homeowners often try to negotiate with their bank so that they can sell their homes for less than they owe in a short sale or have their mortgage balance reduced. But the difference between what the homeowner owes and the lower sales price approved by the bank is considered income for the homeowner and subject to tax by the Internal Revenue Service.

For example, someone with a $100,000 mortgage who is allowed to sell their house for $80,000 is supposed to pay taxes on the remaining $20,000.

But a law known as the Mortgage Forgiveness Debt Relief Act saved such homeowners from the tax burden. Last year, Congress rushed to extend the law during negotiations about the fiscal cliff but only through the end of 2013. Now it’s down to the wire again.

Lawmakers and housing advocates argue that the rule hurts those who are already financially strapped. Since 2009, more than 220,000 homeowners have sold their houses for less than they were worth through a short sale with help from a government program. There are more than 6 million homes still underwater across the country, according to a third-quarter report from research company CoreLogic.

That is down from more than 11 million homes during the peak of the housing crisis in 2009, but it shows that despite the sector’s strong recovery, many homeowners aren’t out of the woods.

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Michigan Auctioning Tax-Foreclosed Land, Houses

The state of Michigan is planning to auction nearly 700 tax-foreclosed properties in 12 counties next week.

The parcels might be vacant residential or commercial lots or might have occupied or abandoned structures on them.

Nearly 350 parcels in northern Michigan will be auctioned off on Tuesday, Aug. 13 at the Ramada Inn in Grayling. The parcels are in Dickinson, Iosco, Iron, Kalkaska, Keweenaw, Luce and Mecosta counties.

More than 330 mid-Michigan properties in Branch, Clinton, Eaton, Livingston and Shiawassee counties will go to auction on Wednesday, Aug. 14th at the Ramada Lansing Hotel & Conference Center.

Properties being auctioned have been foreclosed due to delinquent property taxes. For more information,

visit www.michigan.gov/propertyforeclosures

Proposed Changes to Michigan’s Redemption Period

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Michigan lawmakers are considering changes to the state’s foreclosure law which would significantly shorten the period homeowners have to either sell or save their foreclosed property.

Legislation currently under consideration includes a provision that would shorten the foreclosure redemption period from six months to 60 days. The redemption period is the period of time when homeowners can challenge a foreclosure’s legality, sell their home or reclaim the title and possession of property by paying the debt it secured.

Current the six-month redemption window allows people who are unemployed to get a new job and begin making payments again or, if that fails, sell their home on a short sale.

Supporters of the change say that a longer redemption period often leads to abandoned homes and blight.  According to Patricia Herndon, advocacy director for the Michigan Bankers Association, only about 20% to 30% of delinquent borrowers currently use the state’s process to avoid foreclosure.  That means during the redemption period homes are often abandoned and exposed to criminal elements and stripped of fixtures.

Opponents of the bill maintain the changes will be devastating for Michigan homeowners struggling to save their propertyIn the short term, changes to the redemption period  could prevent some Michigan residents from benefiting from a short sale as closing on a short sale typically takes the better part of the 6-month Redemption Period.  While a short sale doesn’t save the home for the homeowner, it does have financial implications for the homeowner . The neighborhood could also be spared another vacant property.

Certainly both sides have merits in their arguments; the difficulty will be striking a balance between preventing blight and giving homeowners every opportunity to redeem their homes.  Stay tuned for details!