Brad Bates and his wife are racing to sell their Meadowlawn home for $100,000 less than the couple owes the bank.
Sell by the end of the month, and the couple could see their mortgage debt erased. Any later, and the Bates would face a different kind of debt: a tax bill soaring more than $25,000.
"We're not wealthy people," said Bates, 58, a retired Air Force air traffic controller. "That would probably force us … to file for bankruptcy."
Since 2007, distressed homeowners have dodged massive bills due to a tax-time saving grace: The debts they were "forgiven" in foreclosures, short sales or principal reductions were also scrubbed from their dues to Uncle Sam.
But that tax break is set to expire Dec. 31, and with it more than $1 billion in tax savings to homeowners in trouble.
Foreclosed? You'll pay taxes on the money you owed the bank. Close on a "short sale" for less than you owed on your mortgage? You'll still owe part of it to the IRS. Even homeowners whose loan principals are trimmed would see that reduction tacked onto their taxable income.
In Florida, RealtyTrac data shows short sales have gone in recent months for an average of about $103,000 less than what the homeowner owed. If those average homeowners were in a 25 percent tax bracket, they could see a $25,725 increase in their tax bills.
Extending the tax break a year would save American taxpayers $1.3 billion, according to the Joint Committee on Taxation.
But an extension of the tax break remains in Washington limbo amid the broader tax hikes and spending cuts of the looming "fiscal cliff." A Washington policy analyst told the Wall Street Journal the tax break is "the most important piece of housing legislation [that] no one is talking about."
Fears of big taxes on "phantom income" have homeowners and real estate agents rushing to finish sales by year's end. They worry that without an extension, the tax tidal wave could lift homeowners into pricier tax brackets and force some into bankruptcy.
"It could be a cataclysmic thing for some of these families," said Jim Hoffman, a broker associate with Charles Rutenberg Realty. "We're not even through the recovery in housing. We're just starting to crawl. And this isn't going to help."
As the foreclosure crisis blazed in 2007, Congress passed the Mortgage Forgiveness Debt Relief Act to help struggling homeowners soften the blow.
The tax break exempts up to $2 million in forgiven debt on loans used to buy, build or improve a primary home. Debts scrubbed from second homes, or on loans used to pay off things like cars or credit cards, are still taxed.
To avoid the tax, homeowners can file bankruptcy or prove to the IRS they are insolvent, with debts outweighing all they own. St. Petersburg tax problems and bankruptcy attorney Larry Heinkel said, "Almost everyone who is facing a short sale or foreclosure is also insolvent, so it isn't the end of the world if the short sale doesn't occur by month's end."
But the Florida Realtors say the expiration would discourage homeowners from selling in the first place, crimping buyers' options and bringing "short sales to a standstill," said vice president of public policy John Sebree.
The Realtors have called for lawmakers to extend the break, saying, "Homeowners shouldn't be forced to pay tax on money they've already lost with cash they never received."
More than 40 attorneys general, including Florida Attorney General Pam Bondi, also sent a letter to Congress last month saying the break's end would undermine their $25 billion robo-signing settlement with big banks.
That settlement, reached after an investigation into shoddy foreclosure filings, includes tens of billions of dollars planned to pay down homeowner debt. Without an extension of the tax break, the settlement could end up burying homeowners under tax debt at the same time it's offering relief.
The Senate Finance Committee passed a tax package in August that would extend the break, but a full congressional vote has yet to be set. Some agents are holding out for a last-minute save or a retroactive extension passed next year.
Agents said it's too late to start a short sale that could meet the deadline. The sales require bank approval and often take months to close.
"Most of the short-sale people want to be done yesterday," Century 21 broker Craig Beggins said. "But they've got no control over it. It's all up to the servicers and the investors, and they don't care."
Karen Kirchmann said she knows that agony well. After 14 months of trying to sell her and her husband's Clearwater home, the bank finally agreed to a price $40,000 less than they owe.
The couple found a buyer and wrangled a Dec. 28 closing date, but Kirchmann hears the clock ticking. Selling by the end of the year will save the couple the hardship of a $10,000 tax bill.
"I'm beside myself. I'm exhausted," she said. "I'm expecting they're going to screw me once and for all, at the finish line, when there's nothing I can do."
Contact Drew Harwell at (727) 893-8252 or firstname.lastname@example.org.