Informed Homeowners Racing to Short Sale in order to Beat Tax Exemption Deadline

By Jen Lenz

The backlog of overleveraged homes begins to abate. Nation averages place short sales at 31%₃ of total property sales with 27% in California_1, 38% in Nevada₂, and as high as 50% in Florida_. However,there still are a large percentage of people who haven’t decided how to address their overleveraged homes. At the end of 2012, what are these homeowners going to do about their properties when the time to short sale runs out?

In 2013, the Mortgage Relief Act, passed in 2007, expires and then homeowners will pay the IRS to short sale.

The important highlights of the law as discussed on www.IRS.gov  are:

1.     The Mortgage Forgiveness Debt Relief Act of 2007 excludes up to $2 million of debt forgiven on a homeowner’s principal residence or $1 million for a married person filing a separate return.
2.     Debt reduced through mortgage restructuring or foreclosure is tax exempt.
3.     Qualified debt is loan funds used to buy, build or substantially improve a principal residence and debt forgiven is secured by the property.
4.     Refinanced debt used to substantially improve principal residence qualifies.
5.     Refinanced debt used for other purposes like, to pay off credit card debt – does not qualify.
6.     Debt reduced or eliminated will result in a Form 1099-C, Cancellation of Debt, from the lender and the IRS Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness is attached to homeowner’s federal income tax return for the that 1099 tax year; thus eliminating tax liability.
7.     Debt forgiven on second homes, rental property, business property, credit cards or car loans do not qualify for the tax relief provision. In some cases, however, other tax relief provisions – such as insolvency – may be applicable. Form 982 provides details for other exemptions.

“The Mortgage Relief Act’s provision of gift tax exemption for the primary homeowner is the main incentive for sellers and this combined with Home Affordable Foreclosure Alternatives Program (HAFA) of $3000 moving incentive has sold more primary residences thus averting foreclosure than any other measure,” according to economist, short sale specialist, attorney and author of “My Short Sale Guru’s Guide to Healing and Financial Recovery for the Discouraged Homeowners”, Renee Marie Smith, www.smithtitleservices.com. “Without this key tax incentive, which saves homeowners in some cases up to tens of thousands of tax dollars, many homeowners may not want to short sale because owing the IRS is more concerning than facing a foreclosure judge.  Every client I meet with is concerned about the 1099 issued post short sale and if they will owe the IRS money. Getting the HAFA $3000 moving incentive is great but when the tax exemption expires in 2013, the homeowner’s tax obligation will outweigh the HAFA program incentive. We could be setting up the 2013 market for a large decrease in short sales and surge in foreclosures. All the work done by the government and lenders to encourage homeowners to sell over the last 5 years will be undone.”

Unfortunately, some homeowners still don’t know about the short sale option to addressing an overleveraged home. They don’t see any other way out but foreclosure or bankruptcy. And now, even that short sale window is closing at end of 2012.

The homeowners who have an overleveraged home, just defaulted, or in immediate danger of default and have not listed the house for sale must be told they only have one year to solve their debt problem.  Smith states, “For the distressed homeowner, short sales are a once in a lifetime opportunity to be forgiven a substantial amount of mortgage debt due to personal circumstances. The lenders and realtors need to inform them the short sale option won’t last. Short sale processing varies in duration from as little as three weeks to months in some cases, so if a homeowner is contemplating this as an option, they should start now as the completion of the short sale must be done before 2013 to qualify for the 1099 gift tax exemption.”

Smith tells homeowners, “Don’t wait begin the short sale process and move on with your financial future. If you have been fighting the foreclosure to delay moving, reconsider. Selling is a better option since once 2012 ends you may not have a choice left.”

If you are a distressed homeowner or know a homeowner struggling to save a house not worth saving,  contact a realtor about the short sale option and ask for his/her short sales experience. Smith tells homeowners when hiring a realtor to market an overleveraged home, “a realtor’s short sale experience is key to a successful and stress-free short sale.” Smith continues, “For the homeowner worried about the cost of working with professionals to assist in the short sale, there are realtors and companies who will process your short sale for free so lack of income won’t prevent you from selling. Don’t let your time to make informed financial choices pass without having input into your future. Short sales are the best solution in 2012 to an overleveraged property.”

Homeowners can also call their lender as many lenders will help begin the short sale process even before the property is listed for sale.

1 Flowers, Greg, June 3, 2011, www.authenticre.blogspot.com
2 Hidalgo, Jason, August 14, 2010, www.rgj.com
3 Miller, Kimberly, September 22, 2011, www.thepalmbeachpost.com