House Approves Short Sale Tax Break
Following the housing bubble of 2006-2007, Florida experienced a surge of foreclosures and short sales. A short sale is the sale of real property for less than the amount owed the mortgage. Short sales are subject to approval from the bank, but have been a saving grace for millions of homeowners stuck in “underwater homes”.
For many years, short sales were the preferred method of loss mitigation. Banks liked short sales because they were not forced to take on the inventory and manage the home. Borrowers liked short sales because banks were quick to waive the deficiency with short sales. A deficiency is the amount of money remaining due on the promissory note after the sale of the property. In Florida, banks are provided a statutory right to pursue borrowers for deficiency judgments. Accordingly, obtaining a waiver of the deficiency is a huge benefit to the borrower.
There are some downsides to the deficiency waiver, however. Unfortunately, the IRS treats forgiven debt as taxable income. This is largely unfair, because the IRS is taking a form of “phantom” income. In other words, individuals are taxed on income that they never really saw. This comes into play with distressed property, because any time the bank releases a borrower from the deficiency, the borrower is taxed on the amount of forgiven debt.
In the past, there was a tax forgiveness program issued by the federal government in 2007 that waived taxation on this “phantom” income. The tax forgiveness program sunsetted in December 2013, and to date, has not been revived. Last week, however, Congress re-addressed the tax forgiveness program, and the House of Representatives passed a bill to extend the tax forgiveness through 2014. While many of the details of the bill are unclear, the outlook appears positive for those who completed a short sale in 2014.
If the bill passes both houses and becomes law, we expect there to be another uptick in short sales through 2015. The tax forgiveness program allows borrowers an excellent opportunity to get out from under a home and get a fresh start. Now is the time to take advantage of short sales while tax forgiveness is on the horizon; it will not be around forever.
To learn more about short sales visit: www.flapropertylaw.com