Last week, before President Obama left the White House for his family holiday in Hawaii, he signed into law the Tax Increase Prevention Act of 2014. This is now the law of the land, just in time for the end of 2014, and shockingly, it passed both the House and Senate with bipartisan approval and high votes of approval (not many voted against it).
Why is this a big deal for Florida home owners?
.
1. Good News for Short Sales
Well, because this end-of-the-year legislation extends prior legal protection from income taxation of any forgiveness of mortgage debt in a short sale.
Florida home owners who sold their homes in a short sale during 2014 — where their home’s sales price was less than the amount needed to cover the mortgage debt on the home — don’t have to worry about having to pay income tax on that “forgiven amount” (the difference between the two, debt and sales price).
Until President Obama signed that bill into law, everyone had to face the problem of having to pay income taxes on that difference. The only way that a 2014 short sale wasn’t going to get taxed as FIT was if the lender didn’t decide to forgive the debt and was had opted to go after the home owner for the deficiency.
Now, this was not the case for many years.
The Mortgage Debt Forgiveness Act isn’t a new creation of the current Congress. The law that became effective just in time for the holidays is merely an extension of a federal law that had been passed several years ago by the Bush Administration.
For details, read our earlier post, “2014 Surprise for Florida Underwater Mortgages: Mortgage Forgiveness Debt Relief Act Tax Break Has Not Been Extended – Deficiency Will Be Taxed in 2014.”
What President Obama has done here is to extend that longstanding law to the 2014 short sales.
It is a RETROACTIVE application of federal law. It DOES NOT APPLY TO 2015 SHORT SALES.
This is a big deal for many, because as RealtyTrac researchers have noted, the average mortgage forgiveness on a short sale in 2014 was $88,456. That is a lot of money to face in federal income taxation, especially when it’s not additional money in the short sale home owner’s pocket, but an erasing of debt payments or deficiency actions from their future.
RealtyTrac estimated that the average income tax on those short sales would have been $22,114 for the short sale home owner.
So this is great news for anyone who successfully completed a short sale of their home in 2014.
2. Bad News for Short Sales
This new law isn’t great news for everyone, though. While those who completed a 2014 short sale just received a pleasant surprise in the form of a federal gift of around $22,114 they won’t have to pay in income taxes, it doesn’t help anyone who is contemplating a short sale of their home in 2015.
The law that has been signed does not extend to 2015 short sales. In 2015, home owners are going to be planning their finances just as 2014 home owners did: with the understanding that any deficiency that was forgiven by the lender will be taxed as income by the federal government.
The 2015 short sale home owner will receive a 1099 IRS Form from their lender, and the amount on that 1099 will show the amount that will need to be declared on their federal income tax return because it is legally considered as income to them.
Moreover, this is not great news for those who have moved forward with their lives with a short sale, but did not do so because they were worried about the income taxes they understood they would have to pay.
This down-to-the-wire extension of the Mortgage Debt Forgiveness Act may be seen as very frustrating and depressing to those home owners who look back to 2014 and think, “I would have done a short sale if I had known I would not have faced that added income tax.”
After all, short sales fell in 2014 and we have to think that the fear of those big income tax bills was a part of that drop. And what do these home owners do now? Well, that’s a good question, isn’t it?
Any hope for 2015 short sales?
Florida home owners considering a short sale in 2015 legally will have to pay taxes on the forgiven deficiency. Any way around that? Well, an accountant (or other tax professional) may be able to argue to the IRS that the homeowner is legally insolvent and because of the insolvency the forgiven deficiency should not be taxed as income. (Before taking this position with the IRS, you must talk with your accountant, or other tax professional, to determine if this argument has any merit and if it is prudent to pursue this strategy.)
And of course, there is also the chance that the new Congress will act once again to extend the Mortgage Debt Forgiveness Act so it applies to 2015 short sales. Wouldn’t it have been nice if that had been included in the December 2014 law that was just signed?
Do you have questions or comments? Then please feel free to Chat with Larry in the comments below, at info@hallandalelaw.com, 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.
