Lawmakers push again for short sale tax breaks
Legislation that would shield some homeowners from paying income tax after a short sale or foreclosure is quietly making progress in Sacramento and Washington D.C.
California Senate Bill 30, which would posthumously extend a state tax exemption on qualified debt cancellation on a primary residence, finally rose from its slumber in the Assembly, where it had languished since the Senate approved it June 20. The bill recently moved to the Assembly Appropriations Committee, where it awaits a second reading.
Meanwhile, federal lawmakers introduced two bills to again extend the federal version of the tax exemption, set to expire at the end of this year.
This month, Rep. Tom Reed II (R-N.Y.) offered the Mortgage Forgiveness Tax Relief Act of 2013, which would extend the tax exemption for some homeowners after a short sale, foreclosure or loan modification for one more year.
HR 2994 has wide bipartisan support from nine Democrats and eight more Republicans. The bill is in the House of Representatives Ways and Means Committee, which will determine whether it moves past the committee stage.
A similar bill from Rep. Joe Heck (R-Nev.) also is in the House Ways and Means Committee. HR 2788 would extend the mortgage forgiveness tax break for two years.
A U.S. Senate version of Heck’s bill, from Sen. Debbie Stabenow (D-Mich.), is in the Senate Finance Committee. It is co-sponsored by California Sen. Dianne Feinstein.
WHY YOU SHOULD CARE
After a short sale or foreclosure, banks claim their losses to the Internal Revenue Service as debt cancellation and send the former homeowners IRS 1099 forms. The homeowners must report the “phantom income” on their tax returns. That could mean $1,000 to $12,300 in additional state income taxes on a $100,000 loss to the bank, depending upon income level. And the tab for federal taxes could range from $10,000 to $39,600 more.
State Sen. Ron Calderone, D-Montebello, introduced SB 30 on Jan. 3 to extend the terms of California’s Conformity Act of 2010 through the end of 2013. That law – and the federal Mortgage Forgiveness Debt Relief Act of 2007 – expired Dec. 31 last year.
On Jan. 2, Congress approved “fiscal cliff” legislation that, among other things, extended the federal tax protection through 2013. But the state exemption remains in limbo. And with only four months remaining in 2013, time is tight even for the federal legislation.
“Families are stuck in financial limbo,” Calderone wrote in his bill’s analysis. “Homeowners currently in short sale negotiations cannot finalize these transactions without potentially incurring a tax they already cannot afford. Yet they do not have the luxury of time to wait to see if the state will act to provide relief from this tax.”
Despite the recent appreciation in home values, millions of homeowners remain underwater on their mortgages. Online real estate market tracker PropertyRadar reported last week that one-third of California homeowners owe too much to sell their homes and fully pay off the debt.
Of the 6.8 million state homeowners with a mortgage, 1.8 million had negative equity as of July and another 500,000 had too little equity to cover the expenses of selling.
Short sales, loan modifications and foreclosures can take months to complete.
The state tax bill is also tied to a controversial fee that also must be approved in Sacramento as a condition of SB 30’s approval.
Senators linked SB 30 to SB 391, which would create a $75-per-document recording tax to fund an affordable housing trust.
SB 391 would apply whenever a property owner records a document for a refinance, transfer to a trust or other entity, liens, quit-claim deeds, etc. It would not apply to purchases, however. The bill is opposed by Realtor associations, title companies, county recorders and county assessors because they say it would add excessive costs to recording real estate documents.
Supporters of SB 391 say it would generate $500 million per year to build affordable housing.
WAITING AND HOPING
As lawmakers wrangle with the tax exemptions – which cover only debt cancellation on mortgages used to buy, build or improve a primary residence – distressed homeowners wait nervously.
Approval of the extensions would surely ease the pressure on qualified homeowners. But it would not eliminate it. A state extension lasts only until the end of this year. And the federal bill that experts say has any chance of approval includes only a one-year extension.
Loan modifications and short sales can take months, and the timelines are likely to stretch as homeowners rush to beat this year’s deadline. Many home sellers who raced to complete short sales and loan mods at the end of 2012 missed the deadline because of the crush.
The same circumstances are shaping up this year.
Are you qualified for the existing tax exemptions? Call 951-778-9700 today for a 10-minute consultation.