When the Debt Forgiveness Act ends in December, will Short Sales also end... or not?
We aren't hearing much about this act expiring in December. http://www.irs.gov/Individuals/The-Mortgage-Forgiveness-Debt-Relief...-
If it is not renewed - what is the incentive for people to follow through with a short sale? When the sellers are taxed on the debt forgiveness, that can mean paying tens of thousands of dollars in income tax. Kind of like kicking someone when they are already down!
For the most part, sellers who are coming out ahead when they sell are not being taxed on their gains....
Also, if short sales come to a screeching halt, will that mean that banks are going to wind up with more inventory as folks fall into foreclosure...? Will that affect the strength of the banks again as they will have so much inventory on their books?
When I was in D.C. last spring, our legislatures were looking at this act just as a benefit for a few people. It appeared they did not know how this could ultimately affect the foreclosure rate.
Thoughts?
Replies to This Discussion
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Permalink Reply by Wayne Brooks on
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Ginger, HAFA has been extended til 12 31 2013
The Debt Forgiveness Act, dealing with waiver of Taxes, has not been extended, yet. The sale must Close, by 12 31 2012. I would think politicians, being politicians, could not afford to not exrend the act.
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Permalink Reply by Kevin - Greenville, SC on
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HAFA for non-GSE Loans currently runs through the end of 2013, but Freddie Mac and Fannie Mae HAFA will expire at the conclusion of 2012.
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Permalink Reply by Hairman on
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Keep it going with NO expiration date. If you meet the criteria it comes into play.
DONE. Next problem to solve? ( Don't NEED no stinkin politician!)
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Permalink Reply by Jeffrey Burnham on
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The Debt needs to be reduced. Can you imagine the amount of money the government stands to make if they set up payment plans of just 10% of the defeciency of short sale Sellers?!.
Most Short Sale Sellers will have had years to have applied for a SS, or can now do a refi. I think our worlds will be different come December as the "new or old" regime examine post election. Just MY opinion...but I think the IRS will start expecting SOMETHING. (10%?)
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Cheryl,
I did get one piece of information implying it was going to get extended. BUT I also heard there was a possibility it would be changed to allow forgiveness on short sales but tax foreclosure. If it is going to tax foreclose and short sale the best interest would be for a homeowner to do a short sale so the tax would be on a lower amount. makes me wonder if BK's will increase should that happen.
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Maybe I am reading this incorrectly but it seems to be moving in the right direction.
http://www.dailyherald.com/article/20120810/entlife/708109989/
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Permalink Reply by Pattilynn Guilford on
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Its already in the 2013 budget for the last 8 months but has not been passed. Don't count on it. Congress is talking about letting the Bush tax cuts go so they will not be beholden to the No Tax Promise - just let the Bush tax cuts expire. Its called going off the Fiscal Cliff on Jan 1st 2013. Its why the Fed is pumping money into the economy but that will cause even more inflation next year.
Good Question - why short sale if there is no tax advantage? Just stay in the home for as long as you can and save up your money. Maybe if the same president is back in office he can write an Executive Order canceling all mortgages :)
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I've been specializing in short sales for the last 11 years and long before Mortgage Forgiveness Debt Relief Act the IRS has had an insolvency exemption which means at the time of the closing of the short sale transaction, if the homeowner is insolvent, i.e. more liabilities than assets and they are selling their principal res, they will not have a tax consequence resulting from when the lender writes-off the deficiency balance. The homeowner still has to file the correct paperwork with the IRS, form 982 I believe.
Also, if the homeowner has filed a Chapter 7 and included their mortgages in the BK, bankrupt assets are exempt from a tax consequence.
Hope this helps guys.
Allan
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Allan, sort of, as I understand it.
It was explained to me that one can only shield/offset canceled debt up to the actual amount that you are insolvent, prior to the debt being canceled. (i.e. if your net worth is negative $50,000, including the asset/debt in question, you are exempt on UP TO $50,000 only). Essentially, you must have negative net worth (including retirement accounts) excluding the subject property/debt, to fully exclude the canceled debt from taxes. Of course, this is a non CPA opinion.
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This all sounds in check as to what I have heard. But when it was their primary, the mortgage relief debt act kicked in and they did not have to prove to be insolvent, there was no liability. This whole insolvent thing was used by many of the investors in our area who, if they didn't prove to be insolvent, they would have had huge tax liabilities on the forgiven loan amounts on their investment properties; this is just talking IRS, not the lenders judgements etc......again, this is hearsay
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Permalink Reply by Sheila Vardakis on
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Allan....................I have wondered about that very thing.................do homeowners who file BK 7, include their house and then short sale, will they have to pay taxes on the deficiency balance? The fact that they are can not avoid taxes in the BK 7 is the reason I question it. There are four things that can't be avoided and have to be paid and they are taxes, child support and spousal support/alimony, student loans and court fines. If the debt from a primary residence in BK 7 is cancelled then wouldn't the taxes too?
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Hi Wayne. All of my clients are in foreclosure or are about to be and most don't have any retirement accounts or any other assets. By the time they call me, they've exhausted all of their resources. The IRS has an insolvency work sheet as part of their pub 4681 which accompanies form 982.
http://www.irs.gov/pub/irs-pdf/p4681.pdf
If a homeowner doesn't have any assets other than their principal residence, and they have negative income, technically they will never have a significant tax consequence on the deficiency balance. What they owe to their lender(s) is counted as a liability and the FMV of their home is an asset. In a short sale, we selling their home for Fair Market Value - maybe a little bit below.
I don't think my business will be seriously effected by the expiration of the Mortgage Forgiveness Act.
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