Homeowner Tax Fairness Act | Short Sale | Carson | Leesa Hammond

Since 2007, homeowners whose banks have forgiven unpaid mortgage loan debt after a short sale, principal reduction or foreclosure have not had to count that money as income on their tax returns.

It’s meant savings of thousands of dollars on the so-called “phantom income” depending on the amount of debt canceled and a person’s tax bracket.

But the Mortgage Forgiveness Debt Relief Act of 2007 will expire Dec. 31.

With only a few months left before the scheduled expiration, accountants and Realtors are urging homeowners considering a short sale to put their properties on the market now so they can sell before year’s end.

A short sale is where the lender agrees to sell a property for less than what the homeowner owes on the mortgage. Although banks are getting better at processing short sales, finalizing a contract can still take months.

“People are unaware that they could get a huge whack from this,” said real estate attorney Clifford Hertz of Broad and Cassel in West Pam Beach about the tax break expiration. “If they know what’s coming, they can make the right business decision.”

That’s just what Palm Beach Gardens homeowner Jeff Shingledecker did.

He put his home up for a short sale in April after researching the best exit strategy from his underwater mortgage. One day later of listing the home, he had a full price offer of $105,000 and is currently under contract.

Nevertheless, a successful sale will still leave him with $118,000 in unpaid mortgage debt, the money is taxable income.  Considering Shingledecker’s tax bracket, he would owe approximately $29,500 in taxes on that cancel debt. Under the the debt relief act, he won't owe anything.

“This make's the most sense,” Shingledecker said about his short sale decision. "I looked at all the options and assuming everything goes as planned this is the best route". 

During the first quarter of this year, 6,649 short sales were completed in Palm Beach, Broward and Miami-Dade counties, according to the market research company RealtyTrac. That was once a nearly 55% percent increase from the similar time in 2011.

Statewide, 15,949 brief sales have been carried out within the first quarter of the 12 months, an 18 % build up from the similar time in 2011.

However, everyone can’t benefit of the debt relief act. It covers forgiven debt on most main residences up to $2 million, or $1 million if married but filing separately. The act does not apply to second position loans where the money was used for non-household expenses.

If a debt is $600 or above is forgiven, the lender has to send the homeowner tax for 1099C by February of the following year. The tax form must indicate the debt forgiven as well as the fair market value of any property process through foreclosure or short sale. The homeowner must report the forgiven debit of tax form 982.

There are other tax rules that can affect how homeowner’s different tax benefit from the debt forgiveness act, but any relief for a homeowner right now is helpful, stated Realtor Jared Dalto.

“Let’s face it, they didn't have the cash to pay the mortgage in the first place so what makes the IRS think a homeowner can pay taxes on $200,000?” said Dalto, a short sale specialist with the Palm Beach Group at Seawinds Realty.

Josh Angell, an investment adviser with Moore Ellrich and Neal P.A. in Palm Beach Gardens, stated depending on how so much debt is forgiven, a homeowner could be in a higher tax bracket.  Which means they’d not only owe on the forgiven debt but a higher rate.  “It’s a very scary thing to think about when people are financially destitute,” stated Jon Maddux, CEO of YouWalkAway.com, a company that advises homeowners on short sales and strategic defaults. “It can put people in a situation where they will most likely have to file bankruptcy. They’d be insolvent”. 

In March, a bill was introduced in the U.S. House of Representatives to extend the Mortgage Debt Relief Act through the end of 2015.  

Sponsored by Rep. Jim McDermott, D-Wash., the “Homeowners Tax Fairness Act,” may exclude from taxable income cash received for wrongful foreclosure through the $25 billion attorneys general settlement.

The settlement is expected to offer homeowners between $1,500 and $2,000 if they were wrongfully foreclosured.

Jupiter resident Michael Schoenewolff, who hopes to benefit from the debit relief act this year, said he believes Congress will vote to extend the tax break.

Schoenewolff has a short sale contract on his home that would leave him with $95,000 in forgiven debt.

“The average person can’t handle another $100,000 income to be taxed”, he said. “I think they have to vote to extend it in order to allow the housing market and economy to recover”.

Who’s impacted?

Homeowners selling their homes through a short sale or who are in foreclosure may have the unpaid mortgage balance forgiven by their bank.  If that is the case, the debit would be considered taxable income. The Mortgage Forgiveness Debit Relief Act excludes that income from being taxed through December 31, 2012. 

What’s happening?

The debt relief act is scheduled to expire at the end of this year. If no extension is granted, homeowners should pay taxes on any unpaid balance forgiven by a lender after short sale, modification or foreclosure. 

What’s next?

A bill called the “owners Tax fairness Act” was once filed in March that will extend the tax debt forgiveness software via 2015. It requires congressional approval.

[email protected]

Leesa Hammond

Century 21 Amber

(310) 890.4439