As short-sale tax break expires, pressure mounts on homeowners

Kimberly Miller / Palm Beach Post /


Published Dec 9, 2012 at 04:00AM / Updated Nov 19, 2013 at 12:31AM

The race is on to finalize short sales and seal the deal on mortgage reductions as the Dec. 31 expiration of a massive tax break for struggling homeowners looms.

Since 2007, homeowners whose banks have forgiven unpaid mortgage debt after a short sale, principal reduction or foreclosure have not been required to count that money as income on their tax returns.

But the sunset of the federal Mortgage Forgiveness Debt Relief Act means borrowers, who have been spared tens of thousands of dollars depending on the amount forgiven and their tax bracket, may be faced with whopping IRS bills after losing their home.

Florida Attorney General Pam Bondi is leading a group of attorneys general from around the country in lobbying for an extension of the act. In a Nov. 20 letter to lawmakers, Bondi and Connecticut Attorney General George Jepsen said allowing the tax break to expire would dilute the $25 billion mortgage settlement made with the nation’s five largest banks in March.

“Unless Congress acts, all of the remaining debt relief to be provided in 2013 under the National Mortgage Settlement will likely be considered taxable income,” the letter said.

Settlement monitor Joseph Smith, who oversees bank compliance with the agreement, is staying out of the fray. He said the extension is “under the purview of elected officials.”

At the same time, the Congressional Budget Office estimates extending the relief could cost $1.3 billion in lost revenue to the federal government during a period when it is “desperate for money,” said Anthony Sanders, a George Mason University real estate finance professor who is in favor of an extension.

“People are already suffering enough who go through default and foreclosure, and to suddenly give them a tax bill is incredibly cold-hearted,” Sanders said. “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.”

In August, language that would extend the mortgage debt relief act was rolled into the Family and Business Tax Cut Certainty Act of 2012 (S.3521). The act includes about 50 tax-cutting provisions and was approved by the Senate Finance Committee in August.

An aide to finance committee Chairman Max Baucus, D-Mont., said the act is awaiting a vote by the full Senate but has not been given a calendar date.

While many economists, Realtors and accountants believe the mortgage debt relief will be extended, they can’t say how or when.

Sanders said it’s caught up in party politics and a debate that now includes whether to amend the mortgage-interest deduction tax break, a decades-old law that annually costs the government about $100 billion. Even if an extension to the debt relief act isn’t approved by Dec. 31, it could be voted on in 2013 and made retroactive, Sanders said.

Accountant Karyl Neal of the firm Moore, Ellrich & Neal in Palm Beach Gardens, Fla., said settling mortgage debt relief is important but may be less of a priority for lawmakers than averting the fiscal cliff.

Tell that to the owners of the home at 8 Sunningdale Circle in West Palm Beach’s President Country Club, who are trying to finish a short sale before the debt relief act expires. If they don’t, they face an estimated $340,000 in forgiven debt on which they will have to pay taxes, said Shannon Brink, their Realtor.

“We’re scrambling like maniacs to get it closed,” Brink said. “I have some anxiety, but I’ve pulled off miracles before.”

Jeff Shingledecker listed his Palm Beach Gardens, Fla., home as a short sale in April. He considered a loan modification that would increase the term of his mortgage to 40 years but decided to do a short sale after learning about the debt relief act.

After several offers, he said he was “fortunate enough” to close the deal in October and expects to have about $108,000 of debt forgiven.

Considering Shingledecker’s tax bracket, he would have owed about $27,000 in taxes.

“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,” said John DiBiase, communications director for the National Association of Realtors’ government affairs office. “I think that is well-understood, especially by members of the Florida delegation.”

Not everyone can benefit from the debt relief act. It covers only forgiven debt on principal residences and amounts up to $2 million, or $1 million if married but filing separately. The act also does not apply to second mortgages where the money was used for non-household expenses.

Joanne Epstein, a South Florida Realtor, has 18 short sales scheduled to close by Dec. 31 and she’s “breathing down the banks’ necks” to get them finalized.

“They say, ‘We have a stack of files. We’re very busy. We’ll get back to you,’” Epstein said. “Well, I’m sorry — that doesn’t work. These people need to get this over with so they can move on with their lives.”

Debt relief act Q&A

Q: What’s happening?

A: The Mortgage Forgiveness Debt Relief Act of 2007 is scheduled to expire Dec. 31.

Q: Who’s affected?

A: If no extension is granted, homeowners will have to pay taxes on any unpaid balance forgiven by a lender after a short sale, modification or foreclosure. The Mortgage Forgiveness Debt Relief Act excludes that income from being taxed through Dec. 31.

Q: What’s happening?

A: Congress is considering extending the act, but it could cost the federal government $1.3 billion in lost revenue.

Q: What’s next?

A: A bill called the Family and Business Tax Cut Certainty Act of 2012 has been approved by the U.S. Senate Finance Committee and is slated for a vote in the full Senate.

Debt relief act Q&A

Q: What’s happening?

A: The Mortgage Forgiveness Debt Relief Act of 2007 is scheduled to expire Dec. 31.

Q: Who’s affected?

A: If no extension is granted, homeowners will have to pay taxes on any unpaid balance forgiven by a lender after a short sale, modification or foreclosure. The Mortgage Forgiveness Debt Relief Act excludes that income from being taxed through Dec. 31.

Q: What’s happening?

A: Congress is considering extending the act, but it could cost the federal government $1.3 billion in lost revenue.

Q: What’s next?

A: A bill called the Family and Business Tax Cut Certainty Act of 2012 has been approved by the U.S. Senate Finance Committee and is slated for a vote in the full Senate.