You may owe federal income taxes in 2013 if you have a short sale, foreclosure after this year. Now is the time to make the hard decision: Are you going to walk away from your underwater home? Uncle Sam is still giving homeowners until Dec. 31, 2012, to go through a short sale or foreclosure without tax consequences – as long as the lender officially releases the debt.
But on Jan. 1, 2013, the rules change: The amount a lender forgives, ether in a short sale or foreclosure, on a primary residence will be taxable on federal income taxes. So if a house sold $50,000 short of what is owed on the mortgage, then the selling homeowners will owe federal income taxes on that $50,000. Homeowners would owe $12,500 if they’re in the 25 percent bracket; $7,500 if in the 15 percent tax section.
Homeowners would be on the hook even if the house sold but the bank had not formally forgiven the loan in a letter: The banks must officially sign off in writing before Dec. 31. “It’s a huge issue – it will be a shock to many taxpayers after 2012,” said Mark Steber, the Florida-based chief tax officer for Jackson Hewitt Tax Service. The law first came into affect five years ago as the housing market went bust nationwide.
The Mortgage Debt Relief Act of 2007 “generally allows taxpayers to exclude income from the discharge of debt on their principal residence,” according to the Internal Revenue Service. “Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.” Up to $2 million of forgiven debt can be forgiven this year, $1 million if married and filing separately, according to the IRS. Homeowners declaring bankruptcy could escape paying income taxes on any cancellation of debt income if the debt is forgiven in the bankruptcy even if the debtor is solvent, said Nick Jovanovich, a board-certified tax attorney in Fort Lauderdale, Fla. “Bankruptcy trumps everything,” he said.
Or homeowners might not have to pay income taxes on any cancellation of debt income to the extent that they are insolvent immediately before the cancellation – that is, their debts exceed the value of their assets, Jovanovich added. Steber and Jovanovich said homeowners should decide now what they are going to do – to give themselves time. Short sales can take a long time. But lenders “have been gearing up” and speeding up the process. But even if banks quickly approve a short sale, the would-be buyer may get cold feet and the deal fall through. Then the sellers have to begin again.
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Jerry LaRose is an Orlando Area Residential Real Estate Expert and Foreclosure Specialist who can assist you with the purchase and/or sale of Real Estate in Orlando, Windermere, Winter Garden, Kissimmee, St. Cloud, East Orlando, Longwood, Altamonte Springs, Maitland, Winter Park, Oviedo, Apopka, Lake Mary, Clermont, Ocoee Florida or any place in the country. Jerry has created a team of professionals throughout Orlando and the country to ensure that you enjoy a smooth transition to your new area.
Please visit: Avoid Foreclosure / Short Sale Help http://OrlandoShortSaleExpert.com, or http://ShortSellMyOrlandoHome.com Our Website http://JerryLaRose.com or www.JerrySellsOrlando.com, or http://OrlandoRealEstateVoice.com , If you’re a Buyer looking for Great Deals - http://InvestmentPropertyDealsOrlando.com Please give me a call if you have questions about the Orlando and Central Florida real estate market.
P.S. If you are listing your home as a short sale in Orange, Seminole, Polk, Lake, Osceola and Brevard County Florida and Orlando, East Orlando, St. Cloud, Davenport, Clermont, Longwood, Windermere, Winter Garden, Kissimmee, Winter Park, Altamonte Springs, Maitland, Apopka, Lake Mary, Oviedo or Ocoee Florida make sure you hire an agent and realtor who knows how to do short sales and has the experience to get the job done. We are doing successful short sale packages. The short sale process is complicated and we can help simplify it.
We also have now expanded to help homeowners to Stop Foreclosure in Brevard County Florida. Servicing Melbourne, Coco, Coco Beach, Satellite Beach, Palm Bay, Indian Harbour Beach, South Patrick Shores, Palm Shores, Rockledge, Cocoa West, Merritt Island, Port Saint John and Titusville Florida Call us at 407-580-7011 or email at jerry@JerryLaRose.com to find out more about Orange County Short Sales and Orlando Area Short Sales. Orlando Short Sales, expert, specialist, Realtor, Keller Williams Realty, agent, broker, short sale, stop foreclosure
Ah yes, but what about state and local taxes? Many states do not follow the federal tax code, so the discharge of debt is a taxable event to many homeowners. When we work with clients who are underwater, we urge them to consult with their tax adviser or attorney prior to listing with us so that they are aware of all the potential consequences of selling their home short.