Real Estate Blog

Homeowners risk losing tax break to pursue loan modification

June 17th, 2013 9:01 PM by Sherry Lee

By Kimberly Miller - Palm Beach Post Staff Writer

Homeowner advocates celebrated last month when a key federal foreclosure prevention program was extended, but the time gain has turned borrowers into unwitting gamblers, forced to chance a loan modification at the risk of losing out on a short sale tax break.

The Obama administration’s Home Affordable Modification Program is now open through 2015, meaning homeowners rushing to negotiate a deal by year’s end have more time. What hasn’t been extended is a law that allows homeowners who short sell their home to exclude the forgiven debt - usually tens of thousands of dollars - from their income.

That ends Jan. 1, 2014, and means if borrowers pursue a loan modification and fail, they could face a short sale of their home next year without the benefit of the tax break.

“It’s putting people in a crazy situation,” said attorney Paul Krasker, whose West Palm Beach law firm does foreclosure defense and helps homeowners with loan modifications. “Some people wanting to save their home are actually being forced to do a short sale so they won’t owe the IRS.”

Since 2007, homeowners whose banks have forgiven unpaid mortgage debt after a short sale, principal reduction or foreclosure have not had to count that money as income on their tax returns. Originally set to end in December, the Mortgage Debt Relief Act was extended in a last-minute vote on legislation that averted the worst of the fiscal cliff earlier this year.

With some short sales taking months to complete, Realtors say the decision on whether to put a home on the market needs to be made soon so it can close before the Jan. 1, 2014, tax relief cutoff.

Sherry Lee, broker/owner of Lee Property Sales in West Palm Beach, suggests getting a contract on a short sale by the end of September to meet the deadline. But she has one client who would prefer to keep his home with a loan modification instead of put it on the market as a short sale.

“I told him straight up that he has to do the loan mod right now and get an answer because the only other alternative at that point is short sale and it’s already June,” Lee said. “I can’t tell my clients not to roll the dice, but I have to walk a fine line as far as advice.”

The debt relief act has been particularly helpful to South Florida borrowers who saw their home values plummet 51 percent from the peak of the market in December 2006 to a low point in November 2011, according to the Standard & Poor’s/Case-Shiller index. Values have rebounded in recent months and were 43 percent below the peak in March, according to the index.

Under normal circumstances, if a home sells for $150,000 less than what is owed on the mortgage, the borrower would be on the hook for up to $58,500 in taxes, depending on the tax bracket. The debt relief act waives that charge.

“Prices are up so people are closer to getting even and this will be less of an issue,” said Jason Altman, a Boynton Beach accountant who has helped people avoid paying taxes on canceled debt and suggests insolvency as an option to defer phantom income. “This is a problem, but also an opportunity. It’s not the end of the world.”

Not everyone can benefit from the debt relief act. It covers only forgiven debt on principal residences and amounts up to $2 million, or $1 million if married but filing separately.

Krasker said his employees were ecstatic when the Home Affordable Modification Program to reduce monthly loan payments was extended through December 2015 because they were getting nervous about completing clients’ files before the end of the year.

Since the program was announced in 2009, more than 105,000 Florida homeowners, including 46,300 in South Florida, have received permanent mortgage modifications through the program.

But then Krasker realized homeowners would have to make the difficult decision of whether to pursue a loan modification under the threat of missing the tax deadline.

“If they want to continue forward with the modification and take the risk, we tell them that that’s what it is at this point, a risk,” Krasker said. ”We hope the (tax break) will be extended, but as of today, it hasn’t.”

Posted in:General
Posted by Sherry Lee on June 17th, 2013 9:01 PM



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