Short sale? Foreclosure? You're on the 'fiscal cliff'

A provision that eliminates federal taxes on forgiven debt expires Dec. 31. State attorneys general are lobbying to extend the tax break.

By Teresa at MSN Real Estate Dec 12, 2012 7:32AM

© JupiterimagesThe attorneys general of 41 states have joined housing industry advocates, members of Congress and U.S. Treasury officials seeking tax relief for a group that is going to fall hard off the "fiscal cliff" at the end of the year if Congress doesn’t act.

 

That would be those who have lost homes to foreclosure, done short sales or deeds in lieu of foreclosure or received mortgage modifications that included principal reductions.

 

Under U.S. tax law, forgiven debt is considered income and therefore is subject to federal income tax at regular rates. Normally, if you sell your home in a short sale or lose it to foreclosure, you could end up owing the IRS thousands of dollars. The same goes for those who received a principal reduction.

 

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Under the Mortgage Forgiveness Debt Relief Act of 2007, the federal government said that mortgage cancellation on a primary residence was not a taxable event, as long as the money was used to buy, build or improve the home. (If you took out a second mortgage to send your kids to college and the debt was later forgiven, you still may be on the hook for taxes.) The act applies to up to $2 million of forgiven debt.

But that provision expires Dec. 31. So far, although policy wonks say the provision will be extended, it has not been.

 

That means if you sold your home for $200,000 less than you owed, and the bank forgave the debt -- not an unusual scenario in areas where homes are expensive and values fell substantially -- you could owe $50,000 in federal taxes if you’re in the 25% tax bracket.

"If the act expires, you will be asking people to pay cash on an income they never received and with cash they don’t have," John DiBiase, communications director for the National Association of Realtors’ government affairs office, told The Palm Beach Post.

 

The attorneys general argued in their letter to Congress that requiring homeowners to pay taxes on forgiven mortgage debt would negate the benefits of the $25 billion settlement reached with the big banks, which encourages short sales and principal forgiveness.

"People are already suffering enough who go through default and foreclosure, and to suddenly give them a tax bill is incredibly cold-hearted," Anthony Sanders, a George Mason University real-estate finance professor, told The Palm Beach Post. "The government was a major contributor to the housing bubble and burst, so it’s only fair that it extend the act to help households that have been absolutely crushed by the market."

 

If the provision is not extended, those who lost their home to foreclosure may be able to avoid a big tax bill by showing they were indigent, using IRS standards, at the time the home was sold. But not everyone in that situation will meet the test. Bankruptcy is another option, but it brings its own set of problems.

 

What do you think? Should the act be extended? Do you think it will be?

 

 
55Comments
Dec 13, 2012 9:19AM
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Okay, here's a good one:  Since I got a job at 16 and have been working my whole life, I should be able to retire at 65 like I was promised and get my full Social Security.  Now the young people today don't work through high school or college, they get Pell grants and financial aid and then then move back home and live with their parents and figure out what they want to do or flip burgers and party with their little checks until Mom and Dad ask them to get their life started, and around 30 they start out as adults.  Maybe it is all right for them to work until they are 70 because that is only 40 years.  Now since I started working at 16, I should be able to retire now at 55, shouldn't I? because my 40 years are already put in.
So even if you put in that everybody should have to work 50 years, I should be up for retirement at 66.  But these kids that are crying about everything, they better get going because they are going to have to work until they are eighty.  Not because SS is going to run out of money but because they have played for the first 30 years of their lives, and they have yet to start their 50. 

Can't you make it the same for everyone across the board?  It shouldn't be the retirement age, it should be collecting a pension based on the number of years you worked.  Those on welfare get nothing,  homemakers collect of their husband's SS.  The rest work 50 years and then collect based on their income.  Get going folks, the sooner you start, the sooner you can "retire."

Dec 12, 2012 2:21PM
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I am for a safety net to help people that are truly in need. I am just against the safety net turning into a hammock!

Let's be honest. The overwhelming majority of the people that are getting these bailouts are in the situation they are in because of their own actions. Living beyond their means. Living from paycheck to paycheck, taking on debt, buying crap that they don't need on credit, home equity loans. Just so they could get what they wanted when they wanted.

Don't get me started on all the people that I know that are on SSI, the so called unable to work for the rest of their lives, but are always able to do the fun things that they want to do. Be honest you are either one of these people or you know at least one person that is "disabled" and getting federal benefits that are not deserved. I am not talking about the truly disabled, so let's be honest. People have been voting for the politician that has promised to give them things. This way of thinking is destroying our country.

Dec 12, 2012 2:19PM
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obamma u lied if you dont pass this cliff thing what are people gonna do jeese you rich people can take a bow you could be helpin bail us out to many greedy people i didnt vote for him either jeese what a crock
Dec 12, 2012 2:16PM
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i idnt vote for him those of u that did thanks alot, comon bammy and congress or whoever is deciding this  jeese you got enough money quit bein greedy
Dec 12, 2012 1:52PM
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MUHAHAHAHA you wanted obungle reelected him, take a bow, more taxes, yup biggest tax hike in merican history to hit january 1st, which will kill whats left of the middle class and working poor, no jobs more are going to get laid off because of obamacare, obunny and his globalist are raping the treasury and the merican people and i havent heard anyone ask for vaseline, nmm the sheeple like apparently, contact your governors tell them no to obammycare, the supreme court even told the states to not participate in it, tax cuts only for the rich, main street gets nothing, only the rich fatcats, can you say secede, thats the only fix and every states right.
Dec 12, 2012 1:49PM
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I just got done reading all the comments - wow! Yes I would bet there are a lot of the persons that bought more house than they could have afforded but like most of us, the rising costs of food and energy hit at the same time jobs disapeared and took us all for a ride that still isnt over yet. Having the experience of a few layoffs and the resulting belt tightning - my husband and I looked far down the road and adjusted the out flow to keep pace with the in flow. Because we could see that if our business failed (which it finally did) and/or I was laid off (which happend) that the house and land had to be protected for our well being - the rest was nessassary but we could let it go if it got to tight between food or gas. I have empahy for those who bought in on the wave of the "over priced" american dream. Remember that the rent market followed the escalation of housing prices and now how are these folks that have no way to pay the bank putting a roof over thier head or their familys head with no jobs, the non-existant inflation taking food prices for the same ride as the houseing market and now health costs, energy and so on.

 

No I dont think it is fair to be my brothers keeper and pay his taxes too but... the bank (the government) now has the property and they will sell it and still profit from someones elses pain. So after all this plays out - the bank will not lose, the government wont lose, only the person that doesnt have a home anymore looses. It has to be said that only our govenment can see the way through to consider a 200,000 paper loss in property to get out from under a mortgage for a short sale as a personal proffit.

Dec 12, 2012 1:47PM
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Just because you were upside down on your house was never before a reason to walk away, or do a short sale, and get Federal   help on taxes.  So for a while it was a gift, now let it go.  Hey, what if I am upside down on my car, can I get Federal assistance on that pig ???
Dec 12, 2012 1:43PM
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How long do hard working American's have to put up with the antics of our elected officials?  They continue to take OUR money and then redistribute it to groups of their choice (I call them voting blocks)!  I have had it!  The acts of our Senators and Representatives border on CRIMINAL!!!  WE NEED TERM LIMITS!  Plus, it wouldn't hurt if they were required to take an IQ test to make sure they have a rudimentary intelligence level!!!   The Senators and Representatives that don't vote for MAJOR spending cuts are simply selfish idiots!  God help us all!



Dec 12, 2012 1:41PM
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As a home owner that was  faced with a FRAUDULENT lender, my wife and I did what we could to work with the banks to rectify and wrong the "BAD MORTGAGE" we were given... We fought with the bank for over two years being told that we were not "delinquent" on our mortgage so they refused to fix what was wrong... We treied to refinance but since the housing market crumbled and home values dropped b nearly 50% in our area no bank wanted to pick up the loan. We contacted whomever we could to assist us and even had an AUDIT done on the paperwork that pointed out the errors... We bought well within our means until the COST of living sky rocketed.. cost fopr electric/gas to heat our homw went up nearly 100% we still managed to squeak by.... By no fault of my own I lost my job on GOOD FRIDAY of this year as we continued to fight with the bank to try to keep our home and have them wrong the right... we were approved for a modification that would "balance" and or correct what was wrong and are waitting for the paperwork to come in the mail saying it is completed... We DO NOT go out and spend money and even had a financial planner tell us that they can not find any place we can TRIM our budget and expences more than we have and that we live a very frugal lifestyle... The ignorance of those who have not been faced with issues such as ours saddens me... Who gives you the right to bad mouth anyone.. UNTIL you are in my shoes keep you rmouth shut...
Dec 12, 2012 1:37PM
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just another example of barracks gift to the welfare nation.
Dec 12, 2012 1:21PM
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Boy oh boy!!! The majority of people on here seem to know what it is like to live in the real world, the rest of you are a bunch of ****es that get off on running other people down just to make them selves appear to be smarter than they really are.
Dec 12, 2012 1:17PM
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how come the rich only get ax breaks,they make there monyhere they pay tax before they hid it

over seas,un americam p0t lickers

Dec 12, 2012 12:45PM
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Boo hoo, boo hoo I want the government to put a roof over my head. Boo hoo, boo hoo I want the government to put food on my table. Boo hoo, boo hoo I want the government to give be free health care. Boo hoo, hoo I deserve a allowance from the government for my entertainment,

Pay taxes, you're out of you your mind; that's not fair.

Dec 12, 2012 12:42PM
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Responsibility is the key word here...that is what is wrong with this country the nanny government will bail you out if you make a mistake, why should you shoulder any responsibility.  There was a time in this country that a government handout was a "dirty word" and that is why it started as a work program because these people would not accept a handout...now it is completely reversed...how much can we get for nothing.  I take my responsibility of home ownership and bought only the house I could afford and after 20 years still making needed improvements but when I needed more money I did not got to the government, I got a second job to help with some extra cash.   What is going to happen when we the working (poor) class runs out of money, what then?  Same president, same results.
Dec 12, 2012 12:32PM
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Do away with all taxes.  Obama can keep borrowing from China until he can't borrow anymore,Then he can print money until the dollar is worthless.  Once economy fails everyone will be equal like everyone was equal when the Titan was sinking.  Rich or poor it made no difference as all were equal in their efforts to survive.

 

This country is being destroyed from within by the citizens and the morons they elect who no longer take responsibility for their own actions.

 

 

 

 

Dec 12, 2012 12:31PM
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The real fiscal cliff will be the Alternative Minimum Tax that 10's of millions of middle class Americans will owe next Feb/Mar/April when they get their 2012 taxes prepared.  Exemptions fall more than $30,000 for Joint filers and at a 26 or 28% rate- well do the math.  That is enough to turn a 2 to 3 thousand dollar refund into a 2 to 3 thousand dollar balance due.  This will be a butt kicker if not fixed soon.
Dec 12, 2012 12:21PM
Dec 12, 2012 12:20PM
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When do renters get a break for being financially responsible and not buying homes when they couldn't afford one?  They don't have an investment in real estate they can fall back on and haven't used their home as a bank to take vacations, send their kids to private colleges, or pay off credit card debt.  The government says they have to deal with their own fiscal cliff by getting used to the idea of working until they are 70.  What about them?  Screw all of you people that claim your problems are no fault of your own.  Stand up and take responsibility for making bad decisions.  It is your fault, not the government's.  Own up to it.  If you had a tiny two bedroom house and your kids were sharing bedrooms, I have sympathy for you, but nobody I have heard from yet was in that situation.  You all had everything you wanted but none of you planned for losing your job or getting sick, so the fault is yours.  If you didn't have a fall-back plan, it is your fault and you should have been renting.
Dec 12, 2012 12:15PM
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It has been known for a long time that the forgiveness of that tax liability was going to end in 2012.  It hasn't been a secret and wasn't tied to the fiscal cliff.  So it shouldn't be a surprise to homeowners. 

Dec 12, 2012 12:06PM
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Here we are, four years down the road, confronted with the same problems that caused our financial demise in the first place. This, after unbelievable "bailouts aka stimulus" at the taxpayers expense. The Social Brain Trust, that believed they could "orchestrate" the American Dream, to own a house, (of course without being able to afford it) is now coming back to the "tax" well to undo what they created in the first place. We just completed an election and the majority of this country after "ignoring" all of the facts before them, chose to "re-elect" the person and persons (his staff) who clearly showed he and they did not have the talent, expertise or courage to do what was necessary for the "American people" to alter the course of events to fix this problem. No, instead, he now moves "forward" with a "mandate" to continue along the same nose dive path so that he can prove that their "social engineering" was right all along and that we the "complainers" (aka working tax payers) did not know what we were talking about. Well all I can say now is that I hope he and they are right, and that I am completely wrong. But the last I checked, if I don't get up and go to work (and now that is even getting impossible to do), earn a pay check, take care of my bills, I will become a "socially dependent" American, and I will have to be thankful for whatever and anything I can get for nothing. Somehow, the future does not look very bright. I really wish the "majority" who voted, would have listened to the voice of common sense.

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