Time running out for homeowners to do short sales without tax penalty


Published: Tuesday, January 10, 2012 at 7:22 p.m.
Last Modified: Tuesday, January 10, 2012 at 8:00 p.m.

Time is running out on a federal tax break for homeowners who want to unload their homes for less than they paid for them.

Since 2007, the Mortgage Debt Relief Act has allowed owners selling their homes through a short sale to do so without having to pay tax on the amount their mortgage holders forgave them. That will end in 2013, giving homeowners until the end of this year to get out from under their debt without facing tax consequences.

Tim Becker, director of the University of Florida’s Bergstrom Center for Real Estate, said the tax change may force some owners to walk away from their homes outright.

Letting the tax exemption expire doesn’t make sense and runs contrary to the government’s attempts to bring some financial stability to the housing market, Becker said.

“But I’m not sure you’re going to see that much of a rush (of short sales) to December,” he said. “(Short sales) take a while to get approved.”

Judy Ray, president of the Ocala/Marion County Association of Realtors and a broker at Keller Williams Realty in Ocala, said she hopes homeowners don’t rush to short sell their underwater properties.

The 2007 tax law was meant to help people facing hardships, such as job loss, to do a short sale and be forgiven of their debt.

But in some cases, people have taken advantage of the tax break, Ray said, and done what’s known as “strategic defaults” to unload their homes. In those cases, the sellers weren’t facing a financial hardship that warranted having to sell their homes at a loss. Some of those sellers dumped their homes, she said, only to buy another house for less money.

The best strategy for anyone considering asking their bank for permission to do a short sale is to first meet with their accountant and determine the financial consequences of each move.

But the worst thing to do is walk away from your home and force the mortgage holder to take back the property, Ray said.

“My advice is that a short sale is better than a foreclosure,” she said.

The homeowner’s goal should always be to stay in their home.

“They need to know they have more options than just foreclosure,” she said.

The end of the tax break shouldn’t be a surprise.

“They had to do a cut-off sometime” Ray said. “They (government) couldn’t open-end it.”

The tax change means that if a house is sold for $75,000 less than what’s owed on the mortgage, the seller would owe federal income taxes on that amount. If the seller is in the 15 percent tax bracket, they would owe the IRS $11,250.

Regardless of whether there is a run on short sales to avoid taxes, short sales and foreclosures already make up a hefty part of Marion County’s home sales.

In December, area Realtors sold 389 homes. Of those, 96 were foreclosures and 66 were short sales.

Some real estate analysts think doing away with the tax incentive will sabotage the government’s efforts to gradually move people out of homes they can no longer afford.

“Without this key tax incentive ... many homeowners may not want to short sale because owing the Internal Revenue Service is more concerning than facing a foreclosure judge,” wrote Renee Marie Smith, author of My Short Sale Guru’s Guide to Healing and Financial Recovery for the Discouraged Homeowners.

“Every client I meet with is concerned about the (home sale tax form) 1099 issued post short sale and if they will owe the IRS money,” she wrote. “We could be setting up the 2013 market for a large decrease in short sales and a surge in foreclosures. All the work done by the government and lenders to encourage homeowners to sell over the last five years will be undone.”

Contact Fred Hiers at 867-4157.

Reader comments posted to this article may be published in our print edition. All rights reserved. This copyrighted material may not be re-published without permission. Links are encouraged.

▲ Return to Top