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Sept. 26, 2007

Short Sale Tax Relief Introduced in Congress

Rep. Charles "Charlie" Rangel , Democrat from New York and Chairman of the House Ways and Means Committee, today introduced H.R. 3648 to amend the Internal Revenue Code of 1986 to exclude discharges of indebtedness on principal residences from gross income, and for other purposes.

Currently the tax code requires lenders to 1099 a borrower for any debt relief. The IRS then treats this as reported income subject to income tax. This is common with short sales where the lender agrees to take less than what is owed on the property because the sales price doesn't cover what is owed in addition to associated selling costs and any other liens, such as unpaid real estate property tax. The seller avoids foreclosure and an even worse hit to their credit, but now faces a tax bill.

Rep. Rangel refers to this as a "double whammy". His bill would eliminate this double whammy in certain circumstances.

The bill was referred to the House Ways and Means Committee for review.

UPDATE: House Passes Short Sale Related Mortgage Forgiveness Debt Relief

UPDATE: Senate Passes Mortgage Forgiveness Debt Relief Act of 2007

UPDATE: President Bush signs HR 3648, The Mortgage Forgiveness Debt Relief Act of 2007.

*Short Sale and Phantom Tax Debt Relief Overview - an overview of the debt forgiveness portion of the bill.

Posted in Economics, Finance and Lending, For What Its Worth, Real Estate News, Short Sales, Taxes

19 comments

Derin Walters Nov. 7, 2007: When does this go up for vote? If it is approved when would it go into effect?
Bob Nov. 7, 2007: Derin, it was voted on by the house the same week and passed. It was sent to the Senate where it was read and then referred to the Finance Committee. It has sat there since October 4th. I spoke with someone at Finance and they said it wasn't on the schedule. I was told to speak with my Senators to get them to make it a priority. I'll do an update post on this today.
Susie Nov. 7, 2007: What is the tax rate on a short sale if house is sold for less than owed? Will the new tax law be retroactive to a certain date? Thank you in advance....
Bob Nov. 7, 2007: Susie, at present the mortgage debt forgiven is treated as earned income by the IRS. The lender is required by law to 1099 the seller and report it to the IRS. The tax rate would depend on your income and the amount of the debt forgiven. For example, if you make $70,000 a year and the mortgage debt forgiven is $50,0000, then the IRS would expect you to file that as additional earned income, bumping your reported income to $120,000. If the short sale results in a greater loss, say $100k, then you are now looking at the potential of a tax bill based on $170k, which pushes you up the tax bracket. And do not forget about the State of California. They want their piece as well. H.R.3648 would be retroactive to Jan. 1, 2007, but it is languishing in the Senate Finance Committee. Time to call your two Senators and ask them to get the ball rolling. One caveat though - the pending legislation only applies to what they call acquisition debt, or purchase money loans. If this is refi debt, then the law would not apply. It is imperative that homeowners in this situation seek qualified legal and tax advice. For some it may be better to do the short sale and pay the tax. For others, it may be better to just walk. The only way to know for sure is to speak with an attorney who can counsel you on the legal ramifications that are specific to your specific loan, AND a tax expert who can advice you on the monetary costs you could incur. DO NOT LIST your property with any agent until you have done this. If you need a referral to a real estate attorney who deals with these issues, let me know.
kurt Sandhoff Nov. 14, 2007: I am real estate broker who is working with sellers. We are successfull negotiating short sales. Seller are concerned about the tax issues. We can not advise them but would like to refer thme to someone ( porfeesional) who can give them good advice. Please let me know of your services, fees, etc. Kurt Sandhoff
Steve Nov. 20, 2007: Hello, I was granted a short sale for roughly $16,000. As I read the bill, will this basicly eliminate my tax burdon. I was granted the short sale in august 2007, and I am just curious if I will fall under the new law once passed.
Bob Nov. 20, 2007: The bill currently provides for the law to be retro-active to January 1, 2007. If it isn't passed before April 15, 2008, I would talk to a tax attorney or other qualified tax expert. The debt forgiven would also have to be acquisition debt. That would be debt used to purchase the property. If it was a refi loan or a HELOC added after you bought, I don't believe it would be covered.
Connie Yao Nov. 23, 2007: My property dropped drastically and i am having a hard time to pay off my mortgage. I have 1st and second mortage. Can you please let me know what the tax consequence if i foreclosed my property. I am from California.
Bob Nov. 24, 2007: Connie, you need to speak with a CPA or tax attorney regarding your specific situation and the options you may have. The IRS has published <a href="http://www.irs.gov/newsroom/article/0,,id=174034,00.html">Questions and Answers on Home Foreclosure and Debt Cancellation</a> that may provide a few answers.
Connie Tate Nov. 30, 2007: Since this passed the house , does this mean it is effect or do we have to wait for it to pass the senate. Mortgage Cancellation Tax Relief Act, H.R. 3648.
Bob Nov. 30, 2007: It has to be approved by the Senate.
joe Dec. 3, 2007: Does this bill include all homes? Or just owner-occupied homes? If I have a rental home and moved into it, how long do I have to be there to consider it owner-occupied for this bill?
sandy powers Feb. 21, 2008: Reading the comments above it appears that the tax relief bill has not been past, I thought it had. Can you verify this, Thank You, Sandy
Bob Feb. 21, 2008: Sandy, it passed. This is an older post. Check these out: <a href="http://www.homesalessandiego.com/blog/bush-signs-mortgage-debt-forgiveness-act/">Signs Mortgage Debt Forgiveness Act</a> <a href="http://www.homesalessandiego.com/blog/mortgage-debt-forgiveness-law/">Short Sale and Phantom Tax Debt Relief Overview</a>
Dan Jakle March 18, 2008: I have a house that I bought for $600K. I am now trying to sel it at $585, but owe $565K for HELOC and First Mortgage. I have already tried to lower my property tax with the county, but haven't heard yet. I will have to borrow to pay the property tax. I would like to short sale the house. Here is my quesiton. CAn I get debt relief and tax relief for the first mortgage and HELOC both of which were for the purpose of buying the house? How about the realtor's fee? Who pays closing costs?
Robin March 22, 2008: I keep getting conflicting stories...is the new tax law for all houses, or only for my primary residence? I own several investment properties that are upside down and I am trying to figure out the best route to take with them., Thanks.
Bob March 23, 2008: Dan - if the lien holders agree to a short sale, then all costs, including broker fees, are paid from the funds the buyer brings to the table. if the 1st is acquisition debt, then it is covered under the new law. The HELOC may be a different story. If after you closed escrow and you were able to draw on the HELOC, then it can be argued that it isn't purchase money. If the HELOC made up the difference between the purchase price and the total of the 1st and your down payment, then I would argue that it is purchase money. Robin - the new law is ONLY for a primary residence. http://www.homesalessandiego.com/blog/mortgage-debt-forgiveness-law/
Laura April 6, 2008: Hi, Bob I purchased a second home in FL 2005 as vacation home , and the market value is dropped to 150K but I have a loan for 200K. The HOA fee is increased 50% from 2005 and the short rental income couldn’t cover mortgage and expense. It used out of my saving to keep this property. Unfortunately I lost job last month, the payment is behind one month. I called lender to request help, they strongly recommended to short sell and told me they will file 1099 to IRS after short sale, I just found the lender had filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware. My questions are: 1. If I do short sell and pay 1099 tax to IRA, does lender still come after me for a deficiency judgment ? How I can deal with lender who filed bankruptcy ? Is it easy or difficult ? But I already knew their service are very bad right now. 2. I put my second home for sale in market for more than one year, but the market price keep going down, no one interesting. Does my home qualifies for deed in lieu of foreclosure if I file the package lender required ? 3. If the home goes to foreclosure , Does the lender will come to my primary home for deficiency judgment ? I only used my name to loan primary home and second home from different lenders. My primary home is in another state and it has equity. I am looking for lawyer in FL who is familiar with real estate law and tax, could you introduce someone ? Your advices will be helpful and I really appreciate it.
joyce April 17, 2008: I have the same problem, second home in florida, and I WANT to do a short sale, not foreclose or deed in lieu..I am about to list this property because I can't afford the payments but am upside 100K...will they 1099 me as well or will it be a definciency judgment that will follow me around forever? I've never had a late payment in my life and don't want my credit destroyed, who do I call for answers? My primary is also in another state and has equity, but I can't afford the payments on a 100,000 short fall as well as my primary mortgage...

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