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This time last year, we discussed how Congress was “kicking the can down the road” by passing federal legislation that extended the 2007 Mortgage Forgiveness Debt Relief Act’s tax break for one year as part of last year’s Fiscal Cliff legislation. (Read the details here, “Florida Short Sales and Florida Foreclosure Defense Deadline for Tax Benefits is Now December 31, 2013 After Fiscal Cliff Legislation Signed Into Law Today.”)


Will the IRS collect underwater equity from Florida home owners in mortgage loan modifications, etc. in 2014? Yes, unless something happens fast.

Back in 2007, Washington passed the Mortgage Forgiveness Debt Relief Act. This was the federal law that allowed Florida home owners as well as home owners across the country to legally exclude from their income taxes any amount that was forgiven by the bank (on principal residences) after a mortgage loan modification, short sale, or from a foreclosure.

This law was never written to exist in perpetuity; it was a short-term measure. However, as the housing crisis continued, Congress would return to the legislation and allow the tax exemption to continue, extending its life as part of new budget legislation.

Prior to this legislation, Federal law always considered the difference between the sales amount on the foreclosure and the mortgage balance, or the amount negated in a mortgage loan modification or short sale, as income, even though the Florida home owner never saw any dollar bills in the palm of their hand.

However, in these past years (beginning December 2007, until today), the federal government considered this to be income that was not taxable.

Now, that last extension, granted last year, has ended. Congress has not kicked the can again.  As of midnight tonight, that tax exemption will no longer exist. Which is bad news for lots of Florida home owners.

Florida Home Owner Foreclosure Victims and Mortgage Loan Modifications Now Face Tax Debt, Too

What happens now, in Florida and across the nation, is that anyone who negotiates their underwater home in a short sale, or who has their home sold in a foreclosure sale, will face not only the loss of their home but the reality of possibly paying taxes on the balance left on that mortgage. (The property is “underwater” because more money is owed on the home than its fair market value, the sales price, or the foreclosure sale amount.)

That remaining balance must be dealt with, between the borrower and the lender. If the lender and the borrower negotiate a reduction in any of that debt, or if the bank forgives that deficiency amount, then in the past the borrower was free to move forward in life and recover from the loss of their home to foreclosure or short sale.

Now, if that happens, the federal government becomes part of the equation. How? That amount that is forgiven by the bank is going to be considered as taxable income in 2014.

So, that deficiency amount that the bank writes off on its books as a bad debt while it forecloses on the Florida home owner will see that Florida home owner moving forward to deal with a 2014 tax debt.

Of course, this only impacts people with underwater mortgages, right?

As we reported earlier, according to CoreLogic’s latest tally, that is approximately 6,000,000 homes in the United States today – and Florida is number 2 in the country with the most owners holding underwater mortgages. 

What This Means to the Underwater Florida Home Owner

To those in Florida with underwater mortgages, this has financial implications that may impact them for years to come. Unless Congress does something very, very soon to provide relief here, even Florida home owners who receive a mortgage modification — may face tax consequences related to any savings they receive.

Reports are that there are several Senators and Representatives working to get a new extension passed by Congress. Some of their efforts remain in Committee, so there’s no guarantee of another extension.  Let’s hope that happens.


Do you have questions or comments? Then please feel free to Chat with Larry in the comments below, at, or (954) 458-8655. If you have a specific or personal situation, please call or email Larry because he can’t answer specific fact questions in general comments.

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