Pitfalls of Mortgage Cancellation Tax Relief Act, H.R. 3648

By
Real Estate Broker/Owner with Northern Virginia Homes - FRANKLY REAL ESTATE Inc
Update blog post over at My Quote in Washington Post Elaborated:

Do you all know about the Mortgage Cancellation Tax Relief Act, H.R. 3648? You can see NAR's approval of such a bill here.

This bill was enacted to help homeowners that sell their homes via a Short Sale from getting a 1099 tax bill for the loan forgiveness.

For example:

  1. A home is bought for $400,000 in 2005.
  2. The loan amount is currently $390,000
  3. Home can't sell for break even
  4. THe home is listed as a short sale for $340,000
  5. If the banks approve this price, they lose $50,000
  6. The bank is required to 1099 the owner for that $50,000
  7. Owner has to pay taxes on that $50,000 also known as "Phantom Tax"

This bill in theory sounds great!

But the problem is, if there is NO ramification for a seller to do a Short Sale, or fight for a higher price, the result is MORE Short Sales for LOWER prices.

This affects everyone, as home prices will fall futher! (making it worse for others facing foreclosure or short sales)

I suggest instead of wiping out the tax, reduce it, or spread it over 5 years. Why not reduce the burden by 50% or 75% or spread it out over 5 years?

-Written by Frank Borges LL0SA FranklyRealty.com

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Rainmaker
680,057
Brian Block
RE/MAX Allegiance, Managing Broker/Branch Vice President - McLean, VA
Northern Virginia & D.C. Real Estate
Frank, I agree with your thoughts here.  I'm sure there can be some compromise to help these people in dire financial situations while still maintaining decent home values.  Interesting stuff, especially since I may have a short sale listing coming up pretty soon.
Dec 05, 2007 03:54 AM #1
Rainmaker
374,461
Michael Eisenberg
eXp Realty - Bellingham, WA
Bellingham Real Estate Guy

I am not to sure I agree here Frank,  You have someone who can't afford to stay in there home so they have to take give the home back and pay a penalty to the government for this privilege, this is only going to put them further in debt.

I don't see this leading to more short sales as they aren't going through this short sale process to save any tax dollars, they just can't afford the payments on their home.

Dec 05, 2007 04:21 AM #2
Rainmaker
137,641
FRANK LL0SA Esq.- Northern Virginia Broker .:. FranklyRealty.com
Northern Virginia Homes - FRANKLY REAL ESTATE Inc - Arlington, VA

Hello Michael,

Thank you for your thoughts. If there is no ramification for dumping a house $20,000 lower versus $50,000 lower (as there is now), this will result in LOWER prices.

I get it, that they can't afford it, and will get deeper into debt, but this bailout will make it WORSE for everyone else.

Dec 05, 2007 05:32 AM #3
Rainmaker
46,010
Rick Turner
Key Realty - Toledo, OH
Puts People In Their Places!!

Frank,

Right on!  Shame on the buyer who wasn't smart enough to realize he or she couldn't afford the place at the outset...who now penalizes me (who did do the math) because of the bailout, and consequently, my property value is deluted. 

Dec 05, 2007 05:45 AM #4
Rainmaker
129,438
Kevin McGrath
Long & Foster Real Estate Companies- Fredericksburg/Spotsylvania - Fredericksburg, VA
Long & Foster Real Estate Companies

That was my thought exactly. 5 years - that would make it manageable. Now - how do we get that idea out there?

 

Dec 05, 2007 11:04 AM #5
Rainmaker
175,188
Stella Barbour
NoVa Brokers LLC - Vienna, VA
Principal Broker, Serving Virginia and Maryland
I thought that you can already pay if off within 5 years???  Maybe I was misinformed.  I think that the tax relief should be by individual basis.  If I have a client who is doing a short sale due to a situation that was unexpected such as severe or terminal illness or child's terminal illness, (which I have had clients with this situation, even with health insurance they are paying bills over $30K and used equity in their homes) it still prevents the foreclosure and the forthcoming bankruptcy and other debt gets paid instead of easy way out with a Chapter 7,  then it should be considered.  What about the client who was never told what ARM is??? Do they have to suffer the consequences even though they were not educated or explained anything in the mortgage process and they trusted their mortgage broker (who is now being investigated by Feds).  I really think that certain individuals should be able to "be approved" for the tax relief.  Maybe a process that if the lender, agent, appraiser, and/or any other professional was involved in their deal and they are being convicted of fraud, then those individuals should have the relief and more.
Dec 05, 2007 11:25 AM #6
Rainmaker
137,641
FRANK LL0SA Esq.- Northern Virginia Broker .:. FranklyRealty.com
Northern Virginia Homes - FRANKLY REAL ESTATE Inc - Arlington, VA

Stella, I don't know. Where can we find this out? I was told that Short Sellers are supposed to get a 1099 for that tax year. I never heard of a payment plan associated with that.

I just hope those that wrote this bill have thought about how it could open the floodgates for even more short sales. Flood the market with lower prices, and guess what... more people can't sell their homes... more short sales. Rinse and Repeat

Dec 05, 2007 12:03 PM #7
Rainmaker
137,641
FRANK LL0SA Esq.- Northern Virginia Broker .:. FranklyRealty.com
Northern Virginia Homes - FRANKLY REAL ESTATE Inc - Arlington, VA

Stella, I don't know. Where can we find this out? I was told that Short Sellers are supposed to get a 1099 for that tax year. I never heard of a payment plan associated with that.

I just hope those that wrote this bill have thought about how it could open the floodgates for even more short sales. Flood the market with lower prices, and guess what... more people can't sell their homes... more short sales. Rinse and Repeat

Dec 05, 2007 12:04 PM #8
Rainer
80,443
Jeffrey Dolfinger
24/7 Realty Inc. - Poughkeepsie, NY
NRBA Member
IRS form 982 boys and girls!  There is no phantom taxas long as the borrower is insolvent and can prove it in part or whole and the amount of tax due is directly related to that.  Bankruptcy is defined as financial insolvency, so there is no tax if a chapter 7 was filed and discharged.  If a bankruptcy was not filed a foreclosure/short sale situation is a pretty good start so even a half brained tax person should be able to understand the code and mitigate or redue the burden.   You can Google the IRS Code 982.  the new bill is just smoke form 982 has been around at least since 95
Dec 05, 2007 01:07 PM #9
Rainmaker
137,641
FRANK LL0SA Esq.- Northern Virginia Broker .:. FranklyRealty.com
Northern Virginia Homes - FRANKLY REAL ESTATE Inc - Arlington, VA

Hey E

Thanks for your input.

But most Short Sales are done to NOT have to foreclose and go bankrupt. Correct me if I'm wrong.

Also Stella just sent me this: http://www.irs.gov/pub/irs-pdf/f9465.pdf

Dec 05, 2007 01:18 PM #10
Rainer
80,443
Jeffrey Dolfinger
24/7 Realty Inc. - Poughkeepsie, NY
NRBA Member

A short sale is the next worst thing on someones credit next to foreclosure or bankruptcy  If your client does a short and they can't afford the tax liability have them file a bk then its a wash.  Look no ones giving them a mortgage for at least 2 years whether its a short, bk for foreclosure.  The clock will actually start faster for good credit after a ch 7 discharge. 

Again you need not file bk to use form 982 you just need to prove that your in the red financially so clients can use this form to wash their tax liabilities under the guide of an accountant.

Dec 06, 2007 12:30 AM #11
Ambassador
566,489
Rosemary Brooks
BMC Real Estate - 209-910-3706 - Stockton, CA
The Mother & Daughter Realty Team

Consult a professional tax person, real estate attorney or the sort and that you will know what is best for you.  Being in a short sale is not something people are standing in line to do, this is something that is forced upon due to a hardship that you are experiencing.  I think there should be relief somewhere in this vicious cycle to help the owner start over and not just fall below the ground just because the economy or a hardship put them in a bad place.

Families having to move during the holidays, winter months or any time is bad news. If they could not pay their house note, how in the world will they be able to pay their tax bill?

Dec 07, 2007 07:46 AM #12
Rainmaker
137,641
FRANK LL0SA Esq.- Northern Virginia Broker .:. FranklyRealty.com
Northern Virginia Homes - FRANKLY REAL ESTATE Inc - Arlington, VA
I posted an updated blog post at blog.FranklyRealty.com after my quote in the Washington Post today, on this topic
Dec 07, 2007 08:08 AM #13
Rainmaker
40,390
Heather Moriah Martin
eXp Realty - Allentown, PA
REALTOR - Lehigh Valley

Hello Frank!  I believe your post makes sense and I agree with your comments.  I do not specialize in short sales and recently was introduced to the fact that they are much more work then they are worth.  So, most of this stuff is over my head....as I have decided to refer my seller's to other associates that specialize in this market area.  But, your blog was very interesting to me and it surprised me to see NAR going the other way...I would be interested in knowing their reasoning behind the support.

Thanks Again! Moriah Martin

Dec 19, 2007 02:17 PM #14
Anonymous
chapt 7 and real estate tax bill

to make my long story short, i filed chapt 7 for houses and today was the hearing. i'll find out the results after 2mo but today i got this county real estate tax bill for just one house i'm giving up due in near future.

am i still liable for this tax that usually is added in monthly mortgage bill...? thanks

Dec 20, 2007 02:43 PM #15
Rainer
10,119
Sung-Soo Kim
Birch Bay, WA

GOOD NEWS for realtors who are helping home owners working through short sale.  The government just passed a new law that went into effect end of January 2008 to help with phantom tax.  Government will forgive phantom tax on your primary residence.

You can see the track record of the bill that was passed by visiting:

http://www.govtrack.us/congress/bill.xpd?bill=h110-3648

 Sung-Soo Kim
http://www.callhugh.com/

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Feb 01, 2008 07:16 PM #16
Anonymous
Lori Young

Not one customer from H&R Block in an office in Cape Coral Florida ever saw ANY 1099-c's for all the customers who were "going" to "maybe" receive one.  Has any one ever seen a 1099-c for a short sale?????

Jul 11, 2008 03:11 AM #17
Anonymous
Richard Serra

I am facing a short sale on a lot I had intended to build on before everything blew up.  What are the ramifications if it is not a primary residence or land?

Bottom line, realtors work with brokers.  Brokers are trained in the art.  Brokers and/or banks that accepted these deals, presented them or otherwise didn't fully inform a potential buyer are guilty of the worst kind of breach of fiduciary responsibility.

Mar 28, 2009 08:46 AM #18
Anonymous
Don Sabatini

Nice blog and very useful information.     

Apr 30, 2009 05:26 PM #19
Rainer
224,546
Dave Sullivan
Real Estate One - Birmingham, MI
Michigan Realtor with an investor viewpoint

Excellent information I will forward it if that is ok? thank you!!!

Nov 09, 2012 05:17 AM #20
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Rainmaker
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FRANK LL0SA Esq.- Northern Virginia Broker .:. FranklyRealty.com

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