Short sale tax break extension nears approval June 03, 2013; 12:07 PM By Brian Bean & Tim Hardin A bill that would shield some homeowners from paying state income tax after a short sale or foreclosure moved this week closer to approval. Senate Bill 30, which would posthumously extend a tax exemption on qualified debt cancellation on a primary residence, was unanimously approved May 23 by the Senate’s Appropriations Committee to sent to the Senate floor. Lawmakers were hammering out details this week. Senators briefly linked the bill to another controversial tax measure, Senate Bill 391, which would create a $75-per-document recording tax to fund an affordable housing trust. But on Tuesday, the tax levy was disengaged from SB 30. Also this week, Assembly members were working on their own version of the mortgage debt tax exemption, Assembly Bill 42. Earlier this week, it remained in the Assembly Appropriations Committee. SB 391, the California Homes and Jobs Act of 2013, would apply a $75 fee whenever a property owner records a document for a refinance, transfer to a trust or other entity, liens, quit-claim deeds, etc. It would not apply to purchases, however. The bill is opposed by Realtor associations, title companies, county recorders and county assessors because they say it would add excessive costs to recording real estate documents. Supporters of SB 391 say it would generate $500 million per year to build affordable housing. WHAT’S THE BIG DEAL? SB 30’s and AB 42’s approvals can’t come too soon for California homeowners preparing to complete a short sale, or for those who may already have closed one this year. “Families are stuck in financial limbo,” according to an analysis by the bill’s author, Sen. Ron Calderone, D-Montebello. “Homeowners currently in short sale negotiations cannot finalize these transactions without potentially incurring a tax they already cannot afford. Yet they do not have the luxury of time to wait to see if the state will act to provide relief from this tax.” Both bills were introduced in late 2012 to extend the terms of the Conformity Act of 2010 through the end of 2013. That law — and the federal Mortgage Forgiveness Debt Relief Act of 2007 — expired Dec. 31 last year. On Jan. 2, Congress approved “fiscal cliff” legislation that, among other things, extended the federal tax protection through 2013. Banks claim their losses to the Internal Revenue Service as debt cancellation and send consumers IRS 1099 forms, which must be reported on tax returns. After a short sale or foreclosure, California taxpayers could owe as much as $1,000 to $12,300 in taxes on a $100,000 loss to the bank, depending upon income level. The proposed state laws would shield some homeowners from paying those taxes. Terms of the proposed California bills: Tax forgiveness would only be available for debt cancellation between Jan. 1, 2007, and Dec. 31, 2013, possibly through short sale, foreclosure or loan modification. Taxpayers could only exclude up to $500,000 of actual debt cancellation ($250,000 if married filing separately). The tax exclusion would be limited to loans up to $800,000 ($400,000 if married filing separately) Debt could only be forgiven on a qualified principal residence. Second homes and income properties would not qualify. Tax forgiveness would be limited to debt used to “buy, build or substantially improve” a principal residence. If an owner refinanced the home and took out cash to remodel the home, it might be covered. Cash out to pay other bills or make purchases would not qualify, however. “SB 30 is the right thing to do,” Calderone wrote. “Families forced to make the difficult decision to sell their home as a short sale are already in financial trouble. They simply cannot afford to pay an additional tax on money they have never actually received.” KNOW YOUR OPTIONS If lawmakers fail to extend the state law, homeowners who missed last year’s deadline face unexpected tax bills. Approval of the tax exemption bills would surely ease the pressure on qualified distressed homeowners. But it would not eliminate it. An extension would only push the deadline one more year. Loan modifications and short sales can take months, and the timelines are likely to stretch as homeowners rush to beat the deadlines. Many home sellers who were scheduled to close short sales at the end of 2012 missed the deadline because of the end-of-year rush, and are still waiting nervously for the state tax bill to be approved. The likelihood of Congress again extending the federal legislation is low. Anyone facing the same situation this year must plan ahead or risk a massive tax bill next year
Posted on: Tue, 11 Jun 2013 16:00:03 +0000
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