Archive for the ‘short sale taxes’ Category

Congress Extends Mortgage Forgiveness Debt Relief Act

Wednesday, January 2nd, 2013

As expected, Congress has extended the Mortgage Forgiveness Debt Relief Act for one more year. This extension assures that homeowners who short sell their homes, obtain loan modifications or are subject to foreclosures, will not be liable for the taxation on mortgage debt that is forgiven by the lender(s).

Homeowners who currently have a short sale on the market, in escrow, or are considering listing their property as a short sale can breathe a sigh of relief and continue to pursue this path. However, as always, it is important to make sure to consult with your accountant, attorney, and a qualified short sale Realtor before pursuing a short sale or loan modification, in order to assure you are aware of all possible consequences and that it is the right option for you at this time.

The settlement reached by Congress also maintains the current capital gains rates on the sale of principal residences – the first $250,000 for single tax payers and $500,000 for married couples will be excluded.

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Will the Short Sale Tax Break Be Extended?

Tuesday, October 16th, 2012

It is almost here: the dreaded end of the federal short sale tax breaks, also known as the Mortgage Forgiveness Debt Relief Act. Come December 31, sellers who have not yet closed escrow on their short sales will no longer escape the capital gains tax on the difference between the sales price (of their home via a short sale) and the amount owed on their mortgage…UNLESS the tax breaks are extended. Will this  happen, and if not, what will happen to short sales?

First of all, I have to say that I think the tax will be extended. It simply does not make sense at this critical economic time to not extend the tax break. Doing so wreaks all kind of havoc, including surges in foreclosures and bankruptcy filings, which neither the government nor the banks want to see.

Failure to extend the act would undermine everything that is improving in the real estate market and cause us to jump many steps backwards. The fact that an extension has not yet been announced makes people nervous, but due to the Presidential election and other important issues on the proverbial table, I think it has been put on the backburner for a short time.

Lets take a look at the main arguments for not extending the tax break:

1.  Too costly. There are some who believe that the law will not be extended, as they feel the alleged $2.7 billion it will cost to do so is not justified due to the deficit. To this I would say it will be a lot more costly if millions of homes go into foreclosure again, as people find they have no other solution and cannot afford to stay in their homes. The lenders will be stuck with tons of inventory that they have to sell, many that will be trashed, and the market will drop again, creating another real estate nightmare. Just when we are coming out of the bad market is not a good time to cause it to dive again.

2.  Easy escape for homeowners – ? Another argument in favor of not renewing the tax savings is that doing so encourages people to default on their loans. In other words, if people know they can short sale their homes and walk away without financial ramifications, it makes it easier than staying in a home they cannot afford and trying to make it work. I do not agree with this argument, as I think the stress would just lead to more bankruptcy filings and foreclosures, which in the end is even worse for the lending institutions (not to mention for millions of families).

It remains to be seen what will happen come the end of the year. The bottom line is this: if you are contemplating a short sale and your house is not yet listed on the market, or if your home is listed but you have not yet sent any offers over to your short sale lender, it is a good time to discuss your options with both your agent and a financial adviser, CPA and/or attorney. You must understand your options and what could happen if the law is not extended, because it could effect your decision whether to close your short sale.

If you are in the middle of a short sale and you have obtained or are soon to obtain lender approval, you need to make sure that the lender(s) release you in writing from any financial liability once escrow closes, if it is to close after December 31.

[Note that regardless of when your short sale is closing, you should ALWAYS make sure the lender approval letter has language to this effect…most lenders automatically state such in the approval letters, but if not you need to have your agent or negotiator ask that it be included]. You also need to check your state laws to determine state tax liability with short sales, as laws do vary. For more information about short sales you can visit my website.

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Another Way to Avoid Federal Taxation on Short Sales

Wednesday, May 30th, 2012

Are you thinking about short selling your home, but worry about possible tax consequences if it does not close by December 31 (the end of homeowner tax relief under the Mortgage Forgiveness Debt Relief Act)? You may be in luck, even if the Act is not extended.

The Mortgage Forgiveness Debt Relief Act (MFDRA), which prevents the federal government from taxing the difference between the sales price and amount owed on a mortgage in short sale and foreclosure situations, expires on December 31 of this year. Many agents are advising their clients to make decisions quickly if they are planning to short sale their homes, so that there is time enough for marketing and obtaining lender approval before the deadline – and since we are already at the halfway point in the year, time is ticking. But there is another way to protect yourself from the federal taxation even if the act expires and you want to short sale your home.

Little  known to many, the Internal Revenue Code, section 108, provides a “moment of insolvency” document that could save you from taxation should the act not be extended.

Section 108 has an “insolvency” exclusion, which allows you to avoid taxation if you can show you are insolvent. To figure out whether you qualify, you need to take your total liabilities immediately before the discharge of debt, minus the fair market value (this includes exempt assets like retirement accounts and pension plan interest) of your total assets before the discharge. The resulting number will give you the extent to which you are insolvent. This amount cannot be taxed federally.

It is important to note that many people who are short selling or foreclosed upon do not have assets to cover their responsibilities, thus the reason they are in this position. So if the MFDRA is repealed and you didn’t have time to short sale your home before, you may still be in luck. I highly advise you to consult with your CPA or tax professional to see if you are insolvent.


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