Florida Home Owners Need to Short Sale Now Because Income Tax Benefit Goes Away End of 2012: The Mortgage Debt Relief Act of 2007 Expires This Year

Posted By on January 24, 2012

Florida home owners concerned about foreclosure and pondering a short sale should get busy and get that short sale process started.  Why?  There is a countdown to the expiration date of a federal law that will impact them badly if they wait until after the end of 2012 to close on that short sale of their home.

Back in 2007, Congress passed the Mortgage Debt Relief Act of 2007 which created help for homeowners facing foreclosure, giving them according to the White House news release:

… a three-year window for homeowners to refinance their mortgage and pay no taxes on any debt forgiveness that they receive. Under current law, if the value of your house declines, and your bank or lender forgives a portion of your mortgage, the tax code treats the amount forgiven as income that can be taxed.”

The federal law, in sum, meant that any deficiency on a home loan that was forgiven by a lender would not be considered as income for income tax purposes.   This helped people, and in 2008 the tax break was extended to 2012.  However, it hasn’t been extended a second time and now, as of December 2012, it ends.

What does the expiration of the Mortgage Debt Relief Act of 2007 Mean to Florida Home Owners?

The Mortgage Debt Relief Act of 2007 helped lots of people, and it’s already been extended once.  However, that extension period ends December 31, 2012.  No more tax break.

For those in South Florida considering a short sale of their home, this is very important.  In a short sale, the seller sells their home at a price that will not cover the mortgage’s principle balance.  This amount (mortgage amount less sales price) is called the ‘deficiency’ and in Florida, the lender can sue in a civil lawsuit to get that amount from the seller via a “deficiency judgment.”  For more details on this, please read our earlier posts that go into more detail on this process.

However, if the lender agrees to skip that process and waives the deficiency, then the seller gets a real benefit:  the freedom to move forward in life without waiting for another shoe to drop with a deficiency lawsuit or dealing with debt collectors.  And, as long as the Mortgage Debt Relief Act of 2007 is in effect, the seller also gets the benefit of that amount not being sought in a deficiency lawsuit as being taxable income.

After the end of this year, things will change.  Beginning in 2013, lenders will report the amount of the cancelled debt to the Internal Revenue Service on a Form 1099-C, Cancellation of Debt. The mortgage holder will get a copy of this 1099-C which he will have to include in his tax return.  The amount shown on that form will be considered as taxable income by the IRS.

Larry’s Tip

The Mortgage Debt Relief Act of 2007 applies to short sales as well as foreclosures and loan modifications – any time that the lender agrees to take less than the full balance remaining on the mortgage.   It’s a great help to people in these situations.  People that need a break.

In South Florida today, lenders are burdened with lots of foreclosures in process and lots of homes on their books and they are becoming more willing to negotiate with home owners than in years past.  That’s good for Florida home owners wanting to short sale or negotiate new terms for their mortgage.

However,  banks here in Florida are notorious for moving slowly.  Very slowly.  Given this deadline of December 31st to get in under the wire and avoid having taxable income on your short sale, foreclosure, or loan modification, it is not wise to delay or to try and deal with these institutions on your own.  Don’t procrastinate.  And don’t be a Lone Ranger here: get an experienced real estate attorney or short sale lawyer on your team.  They will know the reputation of your lender as well as the legal hurdles involved in your situation.

It’s best to get moving now to make sure you don’t lose this tax break.

If you have questions or comments, please feel free to Chat with Larry in the comments below, at info@hallandalelaw.com or (954) 458-8655.

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