The Mortgage Debt Relief Act of 2007 will expire a few days from now unless a miracle happens – we’ve been concerned about the impact this federal income tax exemption disappearing will have upon Florida home owners, those with underwater mortgages, and the Florida economy as a whole for a while now – and, unfortunately, it’s just now getting the attention it deserves from a lot of people.
Which is too darn bad, because the failure of the federal government to extend the exemption from federal income tax the amount of any deficiency resulting from a Florida short sale is going to hurt a lot of good people in 2013 and beyond.
Sure, the Florida Attorney General joined with lots of other states’ attorneys general to push for an extension. (More on that here.) So far, Pam Bondi’s efforts have not met with success.
A few days ago, Forbes Magazine covered the cruel reality of what is going to happen due to this tax exemption not being revived. The title of their article, “As Fiscal Cliff Looms, Here’s The Expiring Tax Break That Will Hurt Housing Most.” Exactly.
Larry Tolchinsky’s Tip:
With less than two weeks left in the life of the Mortgage Debt Relief Act of 2007, unless something is done, Florida is going to be facing something that will hurt us all. As the Forbes article points out, confirming our take on things, the big increase in short sales has helped Florida and the rest of the country get back on track, housing-wise.
Short sales help buyers, sellers, and banks in this economy because the property is being transferred with a buyer getting a good deal; a seller obtaining a final resolution; and the bank being able to shut the door on a home loan without having to deal with foreclosure and all its complications (legal fees, real estate maintenance, etc.). It’s a good deal for banks: as Forbes points out, the National Association of Realtors finds that last month, short sales mean a 16% discount on the mortgage balances for banks, while foreclosures represent a 20% discount.
This is why short sales are happening: banks like them and that means they are receptive to anxious sellers working toward a short sale.
Unless something happens, those sellers aren’t going to be so anxious to short sale the home if they’re going to face a tax on the deficiency amount as income to them. Sure, it’s only a change of numbers on the bank’s papers – there’s no windfall of cash to the seller here – but the IRS will view that amount as taxable income. This is not a good way to start a new year. Let’s all hope for a miracle!
Do you have questions or comments? Then please feel free to Chat with Larry in the comments below, at firstname.lastname@example.org, or (954) 458-8655. If you have a specific situation, please call or email Larry because he can’t answer specific fact questions in general comments. He’s happy to take your call.