Over the past five years people living in Florida have had the ability to save thousands by using a federal tax break. Unfortunately for Floridians, this tax break is about to expire.
People who have been forced to short sale their homes after 2007 have not been required to claim the forgiven debt as income on their federal tax returns. The Mortgage Forgiveness Debt Relief Act which made this possible ends December 31st 2012.
Many people in the real-estate market as well as financial advisors are urging struggling homeowners to put their houses on the market as a short sale now in the hopes it will sell before the tax break goes away at the end of the year.
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When a lender agrees to sell your property for less than what your current mortgage balance is at, it's called a short sale. The frustration comes when getting the banks to approve and process the short sale once an offer has been made. Historically this process has taken many months and can be dragged out by the banks.
According to CNN short sales have increased across the nation by 33% and in States like Florida, short sales outnumber foreclosures.
There are some restrictions to the debt relief act and not everyone qualifies. The debt forgiveness must be on your principal residence and can't exceed $2 million. The debt reduction must also be on your first mortgage. Second mortgages do not fall under the debt relief act.
Many people are unaware of this change and how it can potentially cost them thousands in taxes come tax season. People need to understand what it's going to cost them now so that they can make the right financial decisions.
According to the IRS code 6050p any debt that is forgiven over $600 must be reported to the IRS on a 1099. This form must declare the amount of forgiven debt as well as the fair market value of the property in question.
With the possibility of having to claim hundreds of thousands of dollars in forgiven debt as income, some home owners may look to some other form of debt reduction to ease the monthly expanses. This could potentially get them out of the financial hole they are in and allow them to keep their home and not be forced into a short sale that could in the end cost them even more than they realize.
There is hope on the horizon. A bill was introduced in March and is being sponsored by Rep. Jim McDermott. This "Homeowners Tax Fairness Act," would also exclude income received from wrongful foreclosures from being taxable. This money is a part of the $25 billion attorneys general settlement, which is expected to give homeowners that had wrongful foreclosures, between $1,500 and $2,000.
With this proposed act, and other debt reduction programs available to people nationwide, people might finally be able to see the financial freedom they have dream of for the past few years.
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