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Saturday, November 16, 2013

IRS: No Income to California Homeowners on Short Sales

Short SaleWall Street Journal, Why Homeowners Could Avoid a Tax Hit:

Troubled homeowners who get a break from their mortgage lenders could face a hefty tax bill next year if a key provision expires at the end of the year, though state laws could determine which borrowers will have to write a check to Uncle Sam.

Homeowners who live in states where mortgages are non-recourse—that is, where they aren’t personally liable for the unpaid balance—may avoid the potential tax hit even if Congress doesn’t act, according to a letter sent by the IRS released by Sen. Barbara Boxer (D., Calif.) on Friday.

The tax provision currently allows some homeowners—mostly those facing foreclosure—to avoid paying taxes on certain relief that they receive on their mortgages. The IRS considers debt forgiveness to be a form of taxable income. That means homeowners who sell their homes for less than the amount they owe in a short sale could face a tax bill.

In 2007, as the foreclosure crisis spread, Congress exempted some homeowners from counting certain kinds of forgiven mortgage debt as taxable income in order to encourage banks and borrowers to seek foreclosure alternatives. Congress retroactively extended the provision earlier this year, after it expired on Dec. 31, 2012. The provision is set to expire this coming Dec. 31 and there appears to be less urgency in Congress right now to pass an extension.

In the letter to Sen. Boxer, the IRS clarified that certain non-recourse debt forgiven by lenders wouldn’t typically be considered taxable income by the IRS. This means that for most California borrowers, the expiration of the tax provision may not have a meaningful effect.

http://taxprof.typepad.com/taxprof_blog/2013/11/california-homeowners-.html

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Comments

Given our politicized IRS, I assume this is only for Blue States?

Posted by: rolo | Nov 17, 2013 10:43:23 AM

Non-recourse means "never refinanced" as refinance loans are almost always recourse loans.

If someone refinances, as advised by Obama, Boxer, and others, perhaps using one of the many govt programs "to keep people in their houses" and still runs into trouble and ends up with a short sale, the loss is taxable income. Meanwhile, someone who didn't refinance and does a short-sale does incur taxable income.

Posted by: Andy Freeman | Nov 18, 2013 11:10:57 AM

The public and the politicians are mixing up what is right and wrong. The big guy is always the bad guy not so in my facts. I operate on the ground so to speak, i have been tax a consultant for many years and get deep into people life. I also have done mortgages as an originator and than received a a Brokers license. Than the debacle occurred. Let me say this that people who grossly mismanaged their life and money should not have the general society pay for it. Meaning that when foreclosures were halted (moratoriam) the general society the taxpayers paid for people to stay in their homes for years without paying dime. I want you to know that many of these people had the same income as they did when they were paying on their mortgages, the difference is they could get away with it. Someone i spoke cursed the F....in Banks because they would not work with him. I said to him are they F....in because they gave you either 200,000 or 300,000 dollars that they should hot have, he borrowed out that much money over and above his cost. Need i say more
any congressman or woman is welcome to contact me Joe 401-952-1603

Posted by: Joe | Nov 19, 2013 11:05:15 AM