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.
The 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?
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."
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.
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.
OBAMA IS DRIVING NAILS IN YOUR COFFIN AS WE SPEAK!!!!!
HELL - THE WHOLE US GOVERNMENT IS HELPING HIM - ALONG WITH THE MEDIA - STUPID VOTERS - HILLARY - MUSLIMS - THE 47% - DETROIT - AND TOO MANY OTHERS TO NAME!!!
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
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.
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.
About Teresa Mears
Teresa Mears is a veteran journalist who has been interested in houses since her father took her to tax auctions to carry the cash at age 10. A former editor of The Miami Herald's Home & Design section, she lives in South Florida where, in addition to writing about real estate, she publishes Miami on the Cheap to help her neighbors adjust to the loss of 60% of their property value.