By Stephen Ryan, Esq.
Q. Back in 2007 Congress approved a debt forgiveness law for homeowners when they do a short sale and the lender forgives the portion of the principal of the mortgage that is not repaid. Is it true that this exclusion ends this year?
A. Yes. Five years ago when the number of foreclosures and homes being sold as short sales began to increase, Congress passed the Mortgage Forgiveness Debt Relief Act of 2007, which was intended to give homeowners facing distressed property situations some relief.
In a short sale a lender forgives some portion of a borrower’s debt. The general tax rule that applies to any debt forgiveness is that the amount forgiven is treated as taxable income to the borrower. Some exceptions to this rule are available but, until 2007, when a lender forgave some portion of a mortgage debt (such as in so-called “short sale,” foreclosures and “workouts”), the borrower was required to pay tax on the debt forgiven.
The law, enacted in December 2007, provides relief to troubled borrowers when some portion of mortgage debt is forgiven. That relief expires on December 31, 2012. While the possibility exists that the law may be extended, as of press time there is no guarantee that this will occur. Thus, REALTORS® would be well-advised to inform their current or prospective short sale sellers that this law’s expiration at the end of this year could result in significant tax liabilities if the transactions do not close on or before December 31st. Given the sometimes extended amount of time it can take to put a short sale through, time may be running out for homeowners to take advantage of this law. NAR is working hard to get this law extended. For the NAR summary/Q&A on this law, go to marealtor.com and click on “Understanding Mortgage Debt Cancellation” under the legal section.
Q. I received a referral from a lawyer in town and he is requesting a referral fee, can I give him one? After all, he is a lawyer so he is not required to take the license exam.
A. You should not pay the lawyer a referral fee unless he is a licensed real estate broker or is a salesperson affiliated with a broker. Massachusetts General Law Chapter 112, section 87AAA prohibits real estate licensees from paying commissions or fees to an unlicensed person.
Lawyers who wish to obtain a real estate broker’s license can do so, however they are required to apply for it. While it is true that lawyers are not required to take the real estate license exam, they are required to provide the Board of Registration with a letter of good standing regarding their bar membership prior to receiving their broker’s license. Lawyers who have not applied for and received a real estate broker’s license are not permitted to receive referral fees.