Mortgage Forgiveness Expiring | Taxes on Short Sale | Brian Bean and Tim Hardin | Riverside Short Sale Agents

Time’s up! Homeowners now need good Plan B

With just three months left in 2012, it may be too late for some homeowners to avoid a massive tax bill after a short sale or foreclosure.

Now, it’s time to think about Plan B.

The federal Mortgage Forgiveness Debt Relief Act of 2007 and California’s Conformity Act of 2010 are set to expire at the end of this year. Both laws exempt some homeowners from paying income taxes after a home goes to foreclosure or short sale.

Banks claim their losses to the Internal Revenue Service as debt cancellation and send consumers IRS 1099 forms, which must be reported on tax returns. A taxpayer could owe as much as $15,000 to $35,000 in taxes on a $100,000 loss to the bank.

With lawmakers focused on the presidential election, it’s anyone’s guess if the tax exemptions will be extended. The federal and state governments are running in the red, and legislators differ on how to balance the budget.

If lawmakers fail to extend the federal law or the state law, which essentially mirrors the federal law but applies to California income taxes, homeowners who miss the deadline face crippling tax bills.

Unless they have a Plan B in place.

‘INSOLVENCY’

Some homeowners who don’t qualify for the tax exemptions may fall under the IRS’s definition of “insolvency,” meaning their liabilities are higher than their assets.

Taxpayers who are insolvent may be exempt from paying income taxes on all or part of the debt cancellation from a short sale or foreclosure. The insolvency calculations, and the rules, are complex, and the tax forms must be completed correctly. This is not a task to be handled with TurboTax.

Step 1: Talk to your tax preparer, preferably an expert with lots of experience in this field, or a tax attorney. Despite what you may have been told by friends, family and neighbors, it’s always better to seek advice from a trusted professional.

(Need a referral to local tax professionals? Call us today at 951-778-9700 and we’ll provide you contact information.)

BANKRUPTCY

In some cases, bankruptcy can wipe out consumer debt with no tax liability. But bankruptcy is like dropping an atom bomb on a credit report – it shouldn’t be taken lightly.

Attorneys who specialize in bankruptcy can help a homeowner determine if such an extreme solution is necessary, or helpful.

The type of bankruptcy you file – reorganization vs. a clean slate – can also have a major impact. And the timing is also critical. Talk to a trusted, experienced attorney for guidance on your specific situation, before the bank takes action.

(Need a referral to a local bankruptcy attorney? Call us today at 951-778-9700 for a good contact.)

PLAY THE ODDS

It’s possible that one or both of the expiring laws will be extended.

In August, a Senate bill cleared a committee that would extend the federal legislation through 2013. But as of midweek, it had not made any more progress.

President Obama’s Fiscal Year 2013 budget, unveiled on Feb. 15, includes a provision to extend the federal act through 2014. But U.S. budgets must survive an exhaustive approval process. And thus far, Congress has unanimously blocked that budget plan.

Earlier this year, legislators in the House introduced the Homeowners Tax Fairness Act to coincide with the $25 billion settlement reached in March with major lenders over improper foreclosures. That bill would extend the tax exemption through 2015 to homeowners and service members for debt cancellation on a primary residence. It remains in the Ways and Means Committee.

If the laws are extended, a homeowner would still have to qualify under the terms of the legislation, which include:

Covers up to $2 million of debt ($1 million if married filing separately) forgiven between Jan. 1, 2007, and Dec. 31, 2012 (or future extended date), possibly through short sale, foreclosure or loan modification.
The forgiven debt must be on a qualified principal residence. Second homes and income properties do not qualify.
The debt must have been used to “buy, build or substantially improve” your principal residence. If you refinanced the home and took cash out to remodel the home, it may be covered. Cash out to pay other bills or make purchases would not qualify, however.

And any new extension would surely ease the pressure on distressed homeowners. But it would not eliminate it. An extension ultimately would have another expiration date, probably just one year away.

KNOW YOUR OPTIONS

Loan modifications and short sales can take months, and the timelines are likely to stretch as homeowners rush to beat the deadlines.

Homeowners who already waited too long to take action now face another deadline: They must know their options before the end of the year, or risk massive tax bills.

Are you qualified for the existing tax exemptions? Call us today at 951-778-9700 and we’ll do the research for you.

(Brian Bean and Timothy Hardin are Default Advocates and owners of Dream Big Real Estate. They can be reached directly at Brian@DreamBigRealEstate.com or 951-778-9700.)

Brian Bean and Timothy Hardin

Licensed Default Advocates

DRE Lic #01889132

Info@DreamBigRealEstate.com

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Mortgage Forgiveness Expiring | Taxes on Short Sale | Brian Bean & Tim Hardin | Riverside Short Sales

Mortgage Forgiveness Expiring | Taxes on Short Sale | Brian Bean & Tim Hardin | Riverside Short Sale Agents

Labels: Bankruptcy, Deficiency Judgment, Foreclosure, Mortgage Forgiveness Debt Relief, Riverside Short Sale Agents, Short Sales

# posted by Scott Chappell and Brian Bean @ 5:30 PM