Florida borrowers hoping to complete a short sale on their home are running out of time to benefit from a massive tax break that can mean savings of tens of thousands of dollars on a single deal.

Since 2007, homeowners whose banks have forgiven unpaid mortgage debt after a short sale, principal reduction or foreclosure have not been required to count that money as income on their tax returns.


But the Mortgage Forgiveness Debt Relief Act will sunset Dec. 31, meaning homeowners could face whopping IRS bills in addition to losing their homes if their sale closes in 2014.


“I don’t think homeowners truly understand the tax consequence or significance of what’s happening,” said Paul Baltrun, director of corporate development for the Law Office of Paul A. Krasker in West Palm Beach. “They haven’t crunched the numbers.”

Without the debt relief act, a homeowner in the 28 percent tax bracket who is forgiven $80,000 in mortgage debt through a short sale would owe $22,400 in taxes on the so-called “phantom income.”


 “There is an education problem out there in that a lot of consumers don’t know what kind of impact this could have,” said Grant Freer, president and owner of Palm Beach Premier Real Estate in Boca Raton.


The tax break was originally scheduled to end in 2012, but it was given a one-year extension by Congress during last-minute budget negotiations that spared the nation from an early 2013 fiscal cliff.

It’s unclear how much support there is for another extension. Two proposals filed by U.S. Sen. Debbie Stabenow, D-Mich., and U.S. Rep. Tom Reed, R-N.Y., would delay the expiration through 2014. Both are still in committee.

The Joint Committee on Taxation doesn’t have an estimate on what it would cost the government in lost revenue to extend the tax break through 2014, but last year it said the one-year extension would cost about $1.3 billion.

Last year’s extension had the backing of several of the nation’s attorneys general, including Florida Attorney General Pam Bondi. Bondi was concerned the $25 billion National Mortgage Settlement that she helped negotiate with the country’s biggest banks would be moot if homeowners who had debt forgiven through the settlement then had to pay taxes on it.

The banks — Wells Fargo, JPMorgan Chase, Citi, Bank of America — have since told the monitor of the settlement that they have satisfied their consumer relief obligations.

Bondi is still considering whether to support another extension of the act, her press secretary, Whitney Ray, said Thursday.

The short sale tax break has been especially crucial in South Florida where homeowners saw housing prices plummet 51 percent from the area’s peak market in December 2006 to its low point in April 2011, according to the Standard & Poor’s/Case-Shiller home price index. Home values have since regained some ground, but in July were still 40 percent below their peak level.

In Palm Beach County, about 32 percent of homeowners with a mortgage owe more on their loan than what their home is worth, according to the Seattle-based research firm Zillow. Statewide, about 35 percent of borrowers are underwater.

With two months until the tax break expires, Realtors said it may already be too late to put a house up for short sale and expect a deal to close before the deadline.

Jared Dalto, who specializes in short sales with the Palm Beach Group at Seawinds Realty, said anything listed now would have to be made a priority by the bank and expressed through the system.

“They are still typically taking three to four months to complete,” Dalto said about short sales.

A recent complication that Dalto has noticed is lenders want more money out of the short sales than in the past, a move that is pushing away buyers.

“The banks are overvaluing their own properties and then they sit there for another five months,” Dalto said. “Banks need to stick with what they know how to do and stay out of the real estate business.”

Not everyone can benefit from the debt relief legislation. It covers only forgiven debt on principal residences and amounts up to $2 million, or $1 million if married but filing separately. The act also does not apply to second mortgages where the money was used for nonhousehold expenses.

Freer said he hopes lawmakers will extend the deadline another year to bolster the economic recovery.

“Congress might do some sort of 11th hour fix,” he said. “But there’s no guarantee.”

Short Sale Before December 31, 2013

• If you owe $250,000 and the property sells for $200,000

• $50,000 in forgiven debt is not reported as income

Short Sale After December 31, 2013

• If you owe $250,000 and the property sells for $200,000

• $50,000 in forgiven debt is considered taxable income

• At a 28 percent tax bracket, a single filer would owe $14,000 in taxes to the IRS

by Kimberly Miller