Make us your home page
Instagram

Homeowners must sell by December to avoid taxes on short sales

the clock is ticking for homeowners to walk away from underwater houses without paying any taxes to Uncle Sam.

After 2012, homeowners will owe federal income taxes in 2013 if they have a short sale or foreclosure. But if a lender officially waives the mortgage deficiency, which allows homeowners to sell for less than they owe, they have until Dec. 31, 2012, to complete a short sale or foreclosure without tax consequences.

But the IRS rule changes on Jan. 1, 2013: The amount a lender forgives on a short sale or foreclosure for a primary residence will be taxable on federal income taxes. Some homeowners might have a tough decision this year: Is it time to sell an underwater home?

After deciding to sell a house in a short sale, homeowners should immediately ask lenders about waiving the deficiency, said Charles Gallagher III, a St. Petersburg attorney.

"If they can get it waived at the outset, it won't bite them back later," Gallagher said.

By not waiving the deficiency, lenders could attempt to collect the money for 20 years. Homeowners could battle collection agencies, garnishment and liens for two decades. Homeowners could also avoid paying the tax on any cancellation of debt income by declaring bankruptcy, Gallagher said.

A deficiency waiver could save homeowners thousands of dollars in taxes.

For example, a property owner who sells for $50,000 short of what is owed on the loan would pay taxes on the $50,000: $12,500 if they're in the 25 percent bracket; $7,500 if in the 15 percent tax section.

The law first came into effect five years ago when the real estate market imploded.

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 the deficiency can be forgiven this year, $1 million if filers are married and filing separately, according to the IRS. Lenders must officially forgive the deficiency in writing by Dec. 31. Homeowners would be on the hook even if the house sold but the bank had not formally forgiven the loan in a letter.

"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.

Short sales are on the rise in the bay area and climbed nearly 25 percent in the last five months of 2011. Currently, more than 4,500 properties in the Tampa Bay area are listed for sale as a short sale.

The deals had typically taken six months or longer to complete. But lenders have streamlined the process in recent months to close the deals quicker.

Information from the (South Florida) Sun Sentinel was used in this report. Mark Puente can be reached at [email protected] or (727) 893-8459. Follow him on Twitter at twitter.com/markpuente.

Homeowners must sell by December to avoid taxes on short sales 01/23/12 [Last modified: Monday, January 23, 2012 11:06am]
Photo reprints | Article reprints

© 2017 Tampa Bay Times

    

Join the discussion: Click to view comments, add yours

Loading...
  1. One of the best places for investing in a rental house is in Tampa Bay

    Real Estate

    Two Tampa Bay ZIP Codes are drawing national attention.

    . If you're looking to invest in a house to rent out, few places are better than  ZIP Code 34607 in Hernando County's Spring Hill area, according to ATTOM Data Solutions.
[LANCE ROTHSTEIN   |  Times
 file photo]

  2. Tampa Chamber of Commerce announces small business winners

    Business

    TAMPA — The Greater Tampa Chamber of Commerce selected the winners of the 2017 Small Business of the Year Awards at a ceremony Wednesday night at the David A. Straz, Jr. Center for the Performing Arts. More than 600 attendees celebrated the accomplishments of Tampa Bay's small business community.

    Vincent Cassidy, president and CEO of Majesty Title Services, was named Outstanding Small Business Leader of the Year by the Greater Tampa Chamber of Commerce.

  3. International array of artists chosen as finalists for pier project

    Local Government

    ST. PETERSBURG — A diverse group of six artists will compete for a chance to install their work at the city's multimillion-dollar Pier District, expected to open in early 2019.

  4. Gourmet food fight between top chefs raises $200,000

    News

    ST. PETERSBURG — The chefs came armed with their secret ingredients — pork rinds, truffle butter, pork bellies.

    (From left to right) Chefs Ryan Mitchell, Michael Buttacavoli, Ted Dorsey and Matthew Brennan compete during Tampa Bay Food Fight at The Coliseum in St. Petersburg on Tuesday. The event features chefs from the Tampa Bay area and benefitted Metropolitan Ministries. EVE EDELHEIT   |   Times
  5. HSN star Joy Mangano promotes new book: Inventing Joy

    Retail

    ST. PETERSBURG — After more than 30 years, Joy Mangano knows a thing or two about promoting products. Now she's promoting herself.

    Inventor and entrepreneur Joy Mangano is releasing her first new book, Inventing Joy on Nov. 7. [TIERRA SMITH | Times]