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

Posted by Joanne Hodge on October 30, 2012 at 5:02am in Short Sale Discussions

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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Replies

  • Raffaella Woods November 25, 2012 at 3:55pm
    I heard this was going to be extended. Does anyone know for sure?
    • Joanne Hodge > Raffaella Woods November 27, 2012 at 9:34am

      Congress must pass the law; it's part of the Fiscal Cliff issue.

    • Kevin - Greenville, SC > Raffaella Woods November 25, 2012 at 4:03pm

      It's been proposed by some State Attorney General's, but personally I doubt it will be.

      http://www.housingwire.com/news/attorneys-general-request-extended-...

      • Raffaella Woods > Kevin - Greenville, SC November 25, 2012 at 4:22pm
        My seller bought a new home in the summer. They have what was their principal residence rented out. The rent does not cover the whole mortgage. Now, due to medical reasons, they cannot keep making payments. There is a first and a second. If we start a Hirt sale now, what will thir liabilities be? They also own a piece of land. They bought it years ago, but -apparently - the realtor at the time did not tell them that there was a moratorium and therefore they have no water and cannot build. They can't pay on this anymore, but who is going to buy an unbuilt able lot? Any suggestions, please?
  • Smitty 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.

  • Joanne Hodge 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.

    • Kevin - Greenville, SC > Joanne Hodge 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.

      • Joanne Hodge > Kevin - Greenville, SC November 27, 2012 at 9:33am

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

         

    • Bryant Tutas > Joanne Hodge October 30, 2012 at 9:42am

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

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