Expiration of Tax forgiveness 12/31/12 What Then?

Assuming that Tax Forgiveness is NOT extended past 12/31/12,

how are you advising your short sale clients selling properties that won't close until January?

Is it really better to get foreclosed after 1/1/13?  Does foreclosure give a tax advantage in 2013 that a short sale would not?

 

 

 

 

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Permalink Reply by Wendy Martin on October 30, 2012 at 5:32am

I have attached the form we are using.

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Permalink Reply by Joanne Hodge on October 30, 2012 at 5:59am

Thanks much!

Permalink Reply by Bryant Tutas on October 30, 2012 at 8:50am

Sellers need to discuss these things with their tax professional. If they have to pay taxes on the short sale then they are one of the few.

There are MANY ways to avoid income taxes on the deficiency. Any good tax professional can sort this out.

The biggest 2 are insolvency and the fact that up to $500,000 (250k per spouse) is exempt from capital gains tax is the property sold is their primary residence.

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/...

Permalink Reply by Jeff Payne on October 30, 2012 at 9:04am

We were doing tons of short sales before and if this expires, we will still be doing tons of short sales....

Permalink Reply by Smitty on October 30, 2012 at 11:50am

lol.. I need a "like" button on your comment.

Permalink Reply by Kevin - Greenville, SC on October 30, 2012 at 9:10am

Business as usual.

Permalink Reply by Joanne Hodge on October 30, 2012 at 9:13am

Thanks, Wendy, Bryant, Jeff & Kevin for the replies

I'm here in CA.  A tax pro tells me  a)  non recourse loans will have a tax forgiveness anyway   AND  b)  the $250K/$500K (single  / married)  capital gains exemption still comes into play, so even if the law is not extended after 1/1/13  a great many short sellers will be able to exempt the forgiven portion of their loans from taxes.... up to those limits......

We need to find a tax person who writes well to post an article explaining all this.

Permalink Reply by Bryant Tutas on October 30, 2012 at 9:42am

Hi Joanne. The law was really really just smoke and mirrors anyway.

Permalink Reply by Kevin - Greenville, SC on November 25, 2012 at 10:06am

According to Richard Zaretsky the income resulting from Mortgage forgiveness is not considered Capital Gains, it's Ordinary Income.  

The Mortgage Debt Forgiveness Act deals with ORDINARY INCOME. This is the income generated by a form 1099A or 1099C - typically from a foreclosure or short sale or deed in lieu of foreclosure.

The 1997 Act, which deals with exclusions of "gain" on the sale of a principal residence, is about GAIN generated by the sale of a primary residence.

The guidelines about how to calculate the GAIN (as in "captial gain", versus INCOME as in "ordinary income") can be found at the GUIDELINES.

So, the $250,000 / $500,000 exclusion has nothing to do with the issue of foregivenes of debt in a short sale, since the former deals with capital gain and the latter deals with ordinary income - like trying to mix oil in water.

http://activerain.com/blogsview/3520776/short-sale-primer-part-ii-1...

As always consult a qualified Tax Professional.

Permalink Reply by Joanne Hodge on November 27, 2012 at 9:33am

Thanks so much.   What a mess!  Hopefully the MDFA will be extended for another year or two....

 

Permalink Reply by Smitty on October 30, 2012 at 11:51am

I don't advise on tax consequences.  I tell them the minute they get their approval to see their accountant.

Permalink Reply by Kevin - Greenville, SC on November 25, 2012 at 10:06am

Yep.

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