Cash-strapped homeowners who chose to short-sell last year have been living under a cloud.
The difference between the outstanding balance on their mortgage and the home’s actual selling price — usually tens of thousands of dollars in forgiven debt — counted as taxable income in 2014.
But, in its typical end-of-the-year flurry of appropriations, the U.S. Congress extended tax relief for mortgage debt forgiveness one more year.
Contained in the Tax Increase Prevention Act of 2014, the tax break for forgiven debt on short sales and mortgage modifications now extends retroactively through the end of 2014.
Jacksonville Realtor Sherrie Braxton, who specializes in short sales, followed the bill’s December progress closely.
“Hell yes, they need (the relief.) They don’t have the money to pay that tax,” she said.
The health of the Jacksonville real estate market turned a corner in 2014, from one dominated by short sales and mortgage modifications, to one that saw a return to more traditional sales, said Valerie Saunders, immediate past president of the Florida Association of Mortgage Professionals.
There are still a lot of homes in the growth-heavy states of Florida, Texas and California that continue to have foreclosures, though. So, the tax relief still matters.
“There still are a lot of consumers who owe more than the house is worth and have no alternative,” Saunders said. “Until we get to the point where property values are higher than what we owe, we’ll continue to see these problems.”
The tax break on mortgage debt forgiveness was put into place during the subprime mortgage crisis. It originally was supposed to expire in 2008, Saunders said. But it was extended to 2009, then 2012, and then 2013.
“It was a case where the government heard from constituents,” she said, “and a testament to the importance of federal legislation.”
A few years ago practically every home purchase Saunders saw was a short sale. In 2014, she had very few. She saw a definite drop in short sales around the second quarter of 2014.
But, there are still plenty homes purchased at the top of the market that are underwater, she said. Saunders herself bought one. It’s possible there were some short sales that didn’t occur in 2014 because the tax break disappeared, she said.
And an IRS tax lien, once incurred, attaches to everything.
“They can freeze accounts and garnish wages,” Saunders said. “There is no judgment protection. You’re almost forced to file for bankruptcy.”