Struggling florida homeowners can save thousands of dollars this year following the passage of an act that allows debt forgiven through short sales to be exempt from taxes.
But Realtors fear too many homeowners aren’t aware that the Mortgage Forgiveness Debt Relief Act was extended through 2015 and made retroactive to cover all of 2014. Congress voted on the action in the latter days of December. President Obama signed it Dec. 19.
“Most people in this situation think that a bankruptcy is their only alternative to wipe out tax liability,” said Jack Watlington, director of default services for Florida Premier Realty in Boynton Beach.
The act, originally approved in 2007, exempts debt forgiven in a short sale from being counted as income on a person’s taxes. Without the exemption, a borrower in the 28 percent tax break who was forgiven $200,000 in mortgage debt would owe $56,000.
Realtors had hoped an extension would be approved last spring, but instead, homeowners lived in limbo all year, not knowing whether they would owe taxes on the so-called “phantom income” of forgiven loan debt.
Last year, short sales nearly dried up in Palm Beach County, dropping 52 percent from the previous year to 963. At the same time, foreclosure sales nearly doubled to 2,679.
Homeowners may have avoided doing a short sale in 2014 since the renewal of the act wasn’t passed until so late in the year, Watlington said.
But there’s no gamble to take this year. Sellers know they have through December to get the tax break. Whether it will be extended another year is unknown.
“The housing crisis is not over,” Watlington said. “We’re not back to normal yet. The problem is, we’re not talking about it as much anymore and the public doesn’t know what’s available.”
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