The Scotsman Guide is reporting that tax relief for sellers in short sales as part of negotiations taking place this week in Washington.
“There could be a reduction [through a short sale] of anything from $40,000 to $400,000, depending on where we are in the country,” said Charles Tassell, chief operating officer for the National Real Estate Investor Association. “When the IRS treats that reduction as income and then gives the person a bill as if that were income, this is somebody who is already in financial straits.”
Tax relief could soon come to sellers in short sales
Scotsman Guide 12/9/15
Home sellers in short sales could be breathing a little easier by next week.
Real estate lobbyists say they are now confident that Congress has reached a deal to extend tax relief for the 2015 and 2016 tax years for sellers in short sales and homeowners who reduce their debts through home-loan modifications.
“I am strongly optimistic that we will see a deal done by this weekend, and that will be a two-year deal,” said John Grant, a Washington, D.C.-based housing lobbyist.
Sellers face paying hundreds, if not thousands, of additional federal taxes if Congress does not extend the Mortgage Debt Forgiveness Relief Act, originally passed in 2007, that waived the federal tax on the forgiven home-mortgage amounts in short sales and some loan modifications. Last year, Congress extended the act to cover the 2014 tax year. The deal would continue the tax break for two more years, including retroactively for the entire 2015 tax year.
Grant said the measure could likely end up in the omnibus bill. Home flippers and real estate investment companies that often buy the homes at discounted prices, have been lobbying for a permanent waiver of the tax.
“There have always been two things on the table, a larger sort of tax-extenders deal and just an extension,” Grant said. “As of today, it looks like the larger plan, which involves some permanent tax extenders, I don’t think is likely to go through.”
An alternative to foreclosure
In a short sale, the lender typically must accept a reduction in the mortgaged amount, so the borrower can sell the home at a lower price and get out of the loan without going through a foreclosure. The home is often severely underwater, with the mortgaged debt exceeding the property’s market value.
Under the federal tax code, however, the forgiven loan amount is taxable. There are exceptions. For example, if the seller can prove they are insolvent, they’re automatically exempted from the tax.
The lobby representing real estate investors, however, said sellers have been left hanging this year because Congress has waited all year to pass an extender that covers the 2015 tax year. Some have been unwilling to gamble that Congress would extend the relief retroactively.
Housing data doesn’t support a claim that short sales have suffered markedly, however. According to the housing data firm RealtyTrac, short sales represented 5.2 percent of all U.S. home sales in October. Through this year, the percentage of homes sold in a short sale has run above 5 percent in all but one month, which is lower than the high-water mark of 8.6 percent in 2011 during the height of the housing crisis, but much higher than the 1 percent prerecession average, according to RealtyTrac data.
Real estate investors say, however, that a potential federal tax penalty has affected sales volumes by making short sales a less viable option.
“There could be a reduction [through a short sale]of anything from $40,000 to $400,000, depending on where we are in the country,” said Charles Tassell, chief operating officer for the National Real Estate Investor Association. “When the IRS treats that reduction as income and then gives the person a bill as if that were income, this is somebody who is already in financial straits.”
Richard Eastern, chief executive officer of Washington Property Solutions, said the late extension has created considerable uncertainty this year among his clients involved in short sales. He said that the tax is basically unfair, and targets people who are already struggling financially.
“It is the kick-me-while-I-am-down tax,” Eastern said.“There are going to be some who just can’t hold on any longer. They want to avoid a foreclosure because that is absolutely the worst thing that could happen to them.”
