SHORT SALES TAX SAVINGS PROBABLY TO EXPIRE DECEMBER 31ST WASHINGTON – Nov. 20, 2013 – For the second consecutive year, key federal IRS tax breaks for homeowners are about to expire. But this year, Congress seems to be making little effort to extend mortgage-forgiveness debt relief, deductions for mortgage insurance payments and home energy-efficiency retrofits after Dec. 31. Last year at this time, there was at least a formal bill pending to extend these tax benefits of homeownership. Now, however, the U.S. House and the Senate are focused on hammering out a budget and a potential major overhaul of the federal tax system, according to real estate writer Kenneth Harney. Consequently, the positive tax treatment of mortgage debt is at stake. • Mortgage-forgiveness debt: Prior to Congress changing the law six years ago, any borrower who had a debt canceled by a creditor – including a principal reduction or a short sale agreement – had to report the amount forgiven as ordinary income; and as ordinary income, it was subject to federal taxes. If a lender opted to cut a homeowner’s principal balance as part of a loan modification before the law change, the IRS would treat that reduction amount as fully taxable income. The same was true for debt forgiven in a short sale – the amount forgiven by the lender would be considered income to the seller, even though he never actually saw any money. Thanks in part to the drop in real estate values, legislators carved out a special exemption for owner-occupied housing that lasted five years and later extended for one year – until Jan. 31, 2013. Under this exemption, the amount of a mortgage forgiven in a short sale or principal reduction wasn’t taxed as income to the homeowner/seller. If that exemption expires on Jan. 1, however, thousands of people in the process of a short sale that doesn’t close until next year might be subject to income taxes on the amounts their lenders cancel as part of the deal. Other homeowner tax breaks set to expire Dec. 31 without further Congressional action include: • Private mortgage insurance (PMI) costs normally paid by buyers who make a downpayment less than 20 percent. This could hurt lower-income buyers who rely on an FHA mortgage, but it also impacts VA loans and any mortgages backed by Fannie Mae and Freddie Mac. • New home energy credits. Up to $2,000 is currently allowed. • Energy-saving improvements. Existing homeowners can, until Dec. 31, take a 10 percent credit for qualified energy-saving home improvements, such as high-performance windows, doors and roofs. Source: Washington Post (11/16/13) P. 8; Harney, Kenneth R. © Copyright 2013 INFORMATION, INC. Bethesda, MD (301) 215-4688
Posted on: Wed, 20 Nov 2013 21:15:52 +0000
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