Short-Sellers, Act Now or Face Big Tax Bill Read more

Real Estate Broker/Owner with BROKER of Green Realty Properties® - 954-667-7253 BK3175566

The Mortgage Forgiveness Debt Relief Act hasn’t been extended yet, so this is of utmost importance to anyone involved in short sales to make sure that this act is extended. Realtors who do short sales and sellers considering doing a short sale should take a look at this article that I was fortunate enough to contribute to.

I truly encourage all real estate professionals and short sale sellers to start calling, writing, sending smoke signals, etc to their elected representatives to make sure that this is extended. It's so critical for many sellers that this is extended. We're talking about massive amounts of taxes being written off that make a huge difference in the seller's finances after the short sale closes. Be proactive, if you are in a short sale situation, start the process now.


Short-Sellers, Act Now or Face Big Tax Bill 

Patty Da Silva Article on Mortgage Foriveness Debt Releif Act

By Polyana da

The tax clock is ticking for homeowners considering short sale and those facing foreclosure. If they don't officially get rid of their mortgages by the end of the year, they could receive jaw-dropping tax bills -- unless Congress acts soon.


The Mortgage Forgiveness Debt Relief Act, which was enacted in 2007 to provide special tax exemptions for underwater homeowners, expires Dec. 31. If the law is not extended, homeowners will have to pay federal taxes on the balance left on their mortgages after a foreclosure or short sale.


"It would affect a lot of people," says Tony Hutchinson, a senior policy representative at the National Association of Realtors. The trade group has been pushing for the extension of the law.


How Much Money Is at Stake?


Without the law, many homeowners could be hit with tax bills for tens of thousands of dollars. Take a homeowner with a mortgage balance of $300,000. If the lender allows the homeowner to sell the house for $200,000 through a short sale, the homeowner would pay federal income tax on $100,000.


In the eyes of the Internal Revenue Service, housing debt that is forgiven or written off is the same as income. If the law expires, forgiven mortgage debt will be taxable. The same applies to foreclosures and to loan modifications in which principal is reduced.


"I've had short sales where more than $200,000 is written off," says Patty Da Silva, a short-sale specialist and owner of Green Realty Properties in Davie, Fla. "For someone in the 30% (tax) bracket, that's $60,000 in taxes."


Congress will likely approve an extension in the eleventh hour, Hutchinson says. But when it comes to Congress and politics, there is always a risk, especially with the looming fiscal cliff and the pressure the government faces to reduce spending. A one-year extension of the bill would cost the government about $1.3 billion, according to a congressional estimate.


"We need to make sure there is some action taken on this," Hutchinson says.


Housing advocates are betting their hopes on a broad bipartisan bill approved by a Senate committee in August. If the bill makes its way through Congress, it would extend the tax break for one year.


Better Safe Than Sorry


Many homeowners and even some real estate agents don't seem aware of the risk and the damage they would face if the act is not extended, Da Silva says.


"Sellers have been very complacent, and they assume it is going to be extended, but what if it's not?" Da Silva asks.


For those who don't want to take a risk, do everything to finalize deals involving debt cancellation by the end of the year, Da Silva says.


"Be as proactive as possible," she says. "Do everything you can do to close. November and December are going to be very busy months."


Even if you close by the end of December, make sure the lender actually writes off the debt before the deadline, says Gil Charney, principal tax researcher with The Tax Institute at H&R Block.


"Communicate with the lender," he says.


If you are modifying your mortgage and the lender agrees to reduce the amount you owe, make sure the process is completed in time to benefit from the extension.


For those with homes in foreclosure, there's not much you can do to speed up the process. But if you know the foreclosure is inevitable and are ready to let go, consider turning over the keys with a deed in lieu of foreclosure to finalize the foreclosure.


How the Act Works


Once the lender writes off the debt, it will report the amount to the IRS. You should expect to receive Form 1099-C showing the canceled debt amount.


There is no need to panic when you receive this form. All taxpayers, including those who qualify for the exemption, will get the form in the mail if they had debt canceled, Charney says.


Those who qualify for the exclusion will be required to file Form 982 when they file their taxes. The exemption applies only to debt related to a primary home. Mortgages on vacation and rental properties are not exempt under the act.


Alternatives in Worst-Case Scenario


If the law is not extended, homeowners who were financially insolvent when the debt was canceled still have one alternative to reduce their tax bill, Charney explains. In short, if your total debt exceeded the value of your assets -- including your 401(k) -- at the time the debt was canceled, you can reduce the tax liability.


Say you were insolvent by $25,000, and the short sale amount of debt canceled was $80,000. Then you would be liable for taxes on $55,000, he explains.


For most underwater homeowners, that would still be a pretty hefty bill.


"Even if somebody is not in financial distress, the value that we are talking about here is pretty big. Who has that kind of money lying around?" Da Silva asks. "This is going to cause a lot of panic if (the act is) not extended."

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Help lots of people and have a great day!

Patty Da Silva, CDPE©, RESS®, AHWD®, e-PRO®, GREEN, CFS, TRC, RSPS

BROKER - REALTOR® Serving South Florida ::: 954. 667. SALE (7253) ::: Green Realty Properties®

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Copyright © 2008 - 2015 By Patty Da Silva, CDPE©. All Rights Reserved.

Legal Stuff: This article (Contents) reflects the opinion of the author and it is not to be considered legal advice. The author is not an attorney or a CPA. If you are in need of legal or tax advice, it is recommended that you to contact a trusted professional advisor.


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Ron and Alexandra Seigel
Napa Consultants - Carpinteria, CA
Luxury Real Estate Branding, Marketing & Strategy


This post is chock full of excellent and pertinent information, and I hope everyone who finds themselves in this position does act before the 31st of December...I am suggesting, A

Oct 12, 2012 07:44 AM #1
Patty Da Silva, Davie, Southwest Ranches Cooper City, Plantation, Weston, REALTOR
BROKER of Green Realty Properties® - 954-667-7253 - Davie, FL
Top Listing Broker

Thank you so much A. Sellers and agents need to know this crucial information.

Oct 12, 2012 07:54 AM #2
Christopher Green
Green Realty Properties, Inc - Davie, FL
Cooper City :: Davie Top REALTOR

I completely agree with Alexandra! Patty, this is a fantastic article and I just suggested it!

Oct 12, 2012 08:38 AM #3
Anna Banana Kruchten CRB, CRS, Broker
Phoenix Property Shoppe - Phoenix, AZ
Arizona's Top Banana of Real Estate!

Patty - excellent information - and extremely timely.  We all need to take action on this bill.  Personally we have been strategizing on how best to deal with this should the bill not get extended and  homes have not sold short (yet) and/or foreclosed.  Very serious consequences for the folks who can least afford to owe thousands if not much much more in taxes.  Nightmare - to say the least.


Even if you close by the end of December, make sure the lender actually writes off the debt before the deadline, says Gil Charney, principal tax researcher with The Tax Institute at H&R Block.

Featured in BananaTude

Oct 12, 2012 08:59 AM #4
Kathleen Daniels
KD Realty - 408.972.1822 - San Jose, CA
San Jose Homes for Sale-Probate & Trust Specialist

Patty, I have one new short sale listing that is biting their nails that we can close by the end of the year. I will do the best possible to make that happen - as you know ... it's going be challenging especially with two loans.

If it does not close, the seller will let it foreclose then file bankruptcy.  That the one obvious, or not so obvious consequence of Debt Forgiveness not being extended. 

Great contribution to the article! 

Oct 12, 2012 10:56 AM #5
Kathy Sheehan
Bay Equity, LLC 770-634-4021 - Atlanta, GA
Senior Loan Officer

There are going to be many surprised homeowners. Suggested too!

Oct 12, 2012 11:25 AM #6
Lou Ludwig
Ludwig & Associates - Boca Raton, FL
Designations Earned CRB, CRS, CIPS, GRI, SRES, TRC


Thanks for sharing a very timely tip on what could be a big time issue for short sellers in 2013 and beyond.

Good luck and success.

Lou Ludwig

Oct 12, 2012 11:38 AM #7
Linda S. Cefalu, Broker Assoc.
Coldwell Banker Homesale Realty - Hales Corners, WI
I'll Take You Home

Thanks for putting this out there again.  I've been sounding this horn for at least two years now, but it keeps falling on deaf ears.  I appreciate that you made this a topic for discussion and hope all will listen.  Phone calls and letters to our representatives to count and they do help.  Let's all work together to get this done soon.

Oct 14, 2012 08:54 AM #8
Patty Da Silva, Davie, Southwest Ranches Cooper City, Plantation, Weston, REALTOR
BROKER of Green Realty Properties® - 954-667-7253 - Davie, FL
Top Listing Broker


Chris, thank you!

Anna, I’ve been strategizing too just in case, but I really, really hope they extend. I don’t think people realize how serious it is. Thanks for the feature!

Kathleen, you sure have an uphill battle ahead of you trying to close that one with 2 loans. Good luck!

Kathy, I know, that’s what I’m trying to avoid by telling everyone I can. Thank you!

Lou, you’re welcome. Just trying to help out.

Linda, falling on deaf ears indeed! No one pays attention until we’re down to the wire. I hope we prevail.

Oct 15, 2012 06:53 AM #9
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Patty Da Silva, Davie, Southwest Ranches Cooper City, Plantation, Weston, REALTOR

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