Don’t be fooled folks. Here in St George Utah and everywhere else in this country the government has failed us again. The federal tax code treats forgiven debt as ordinary income to the borrower, taxable at regular rates. But under an exception that took effect in 2007, qualified home mortgage debt that is canceled by a lender as part of a short sale, loan modification or foreclosure is treated as non-taxable. However, that exception expired last Dec. 31 and its renewal has been in doubt all year — leaving short-sellers unsure whether they would be facing crushing taxes in 2015. Thousands of Americans who completed short sales during 2014 and received cancellations of mortgage debt by banks had reason to celebrate when the Senate extended the exception for transactions just before adjourning for the holidays. According to data prepared for this column by research firm RealtyTrac, nearly 122,000 short sales went to closing nationwide between January and October, involving an estimated average debt forgiveness of about $88,500. The average seller had a mortgage balance one and a half times higher than the market value of the house. In a short sale, an underwater homeowner agrees to sell the property to a new purchaser, typically for a price well below what is owed to the bank. If the bank agrees to the sale, the proceeds pay off part of the loan balance and the bank forgives — writes off — the rest. Well the FEDs waited until the very end of the year. That didn’t help the poor folks that didn’t try a short sale because they had no reason to for all of 2014! guess what the FEDs still haven’t agreed to go into 2015 with the Mortgage Forgiveness Tax Relief Act. So again potential homeowners faced with a short sale will be wondering why the heck should I. Gas or hot air is all we get!! Too little too late as far as most real estate agents including myself. I am mystified that Congress could not have lengthened the extension to two years — retroactive for 2014 and good through Dec. 31, 2015 — a provision approved in a bipartisan vote by the Senate Finance Committee last summer. He predicts that without protection from heavy tax burdens, many underwater owners will opt instead for bankruptcy filings. In some cases, they might be able to qualify for an “insolvency” declaration, which could wipe away tax liability for unpaid mortgage balances. How do you know whether your short sale, loan modification or foreclosure is covered by the extension for 2014? Though a tax professional familiar with the law should be your best guide, here are the key tests you’ll need to pass: The house securing the mortgage debt must be your principal residence. The maximum amount of debt that qualifies for relief is $2 million ($1 million if you are married filing taxes singly.) Any portion of the mortgage debt forgiven that was used for purposes other than improving or building the house — say you refinanced, pulled cash out and used it to buy a car — will not qualify for the exclusion and may be taxable. What are the prospects that Congress will extend the law for 2015, covering people who didn’t quite make the deadline for 2014? Not great. The Republican tax policy leadership in the House favors broad tax reforms in the upcoming session and wants to put an end to temporary tax code benefits that require periodic extensions. Unless proponents can make a strong case for mortgage debt relief as a permanent part of the tax code, it will be tough to get it extended again. Congress acts like they have saved the day when in reality they toyed with short sale sellers all year and will have accomplished very little. More than likely created more bankruptcy cases. I say quit playing games and make this permanent. It will end all by itself when this underwater housing market in St George and all over the country heals. Well that’s my story from sunny St George Utah. Do it correctly or do not do it at all!
Note-Please consult a tax specialist for all tax questions.
