Tax break for Florida real estate short-sellers expires at end of 2012
WEST PALM BEACH, Fla. – June 26, 2012 – Struggling
Floridians have saved untold fortunes with a nearly five-year-old
federal tax break that is about to go away.
Since 2007, homeowners whose banks have forgiven unpaid mortgage 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 tens of thousands of dollars on the so-called
“phantom income” depending on the amount of debt canceled and a person’s
But the Mortgage Forgiveness Debt Relief Act of 2007 will sunset Dec.
With just six months 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
“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. Within 24 hours of listing
the home, he had a full price offer of $105,000 and is currently under
Still, a successful sale will leave him with $118,000 in unpaid loan
debt. If the bank forgives that balance, the money is taxable income.
Considering Shingledecker’s tax bracket, he would owe about $29,500 in
taxes on that canceled debt. Under the debt relief act, he won’t owe
“This made the most sense,” Shingledecker said about his short sale
decision. “I looked at all the angles 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 firm RealtyTrac. That was a nearly 55 percent increase from the
same time in 2011.
Statewide, 15,949 short sales were conducted in the first quarter of the
year, an 18 percent increase from the same time in 2011.
But not everyone can benefit from the debt relief act. It only covers
forgiven debt on principal residences and up to $2 million, or $1
million if married but filing separately. The act also does not apply to
second mortgages where the money was used for non-household expenses.
If a debt of $600 or more is forgiven, the lender is required to send
homeowners a tax form 1099-C by Feb. 2 of each year. The form must state
the amount of debt forgiven as well as the fair market value of any
property given up through foreclosure or a short sale. Homeowners must
report the forgiven debt on tax form 982.
There are other tax rules that can affect how homeowners benefit from
the debt forgiveness act, but any relief for a homeowner right now is
helpful, said Realtor Jared Dalto.
“Let’s face it, they did not have the money 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 & Neal P.A. in
Palm Beach Gardens, said depending on how much debt is forgiven, a
homeowner could be pushed into a higher tax bracket. That means they’d
not only owe on the forgiven debt but also at a higher rate.
“It’s a very scary thing to think about when people are financially
destitute,” said 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,” would also exclude from taxable income money received for wrongful
foreclosure through the $25 billion attorneys general settlement.
The settlement is expected to give homeowners between $1,500 and $2,000
if they had a wrongful foreclosure.
Jupiter resident Michael Schoenewolff, who hopes to benefit from the
debt 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 in 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.”
People selling their homes through a short sale or who are in
foreclosure may have the unpaid balance of their loan forgiven by the
bank. If so, that debt would be considered taxable income. The Mortgage
Forgiveness Debt Relief Act excludes that income from being taxed
through Dec. 31, 2012.
The debt relief act is scheduled to sunset at the end of this year. If
no extension is granted, homeowners will have to pay taxes on any unpaid
balance forgiven by a lender after a short sale, modification or
How does it change your sale?
If you are considering a short sale, you may want to put your home on
the market now so a sale can close before the end of the year and
qualify you to take advantage of the debt relief act before it expires.
A bill called the “Homeowners Tax Fairness Act” was filed in March that
would extend the tax debt forgiveness program through 2015. It requires
Copyright 2012 The Palm Beach Post (West Palm Beach, Fla.). Kimberly
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