As very few probably know, including myself until recently, the House of Representatives has passed an early holiday gift for taxpayers concerning real estate. It is also expected that the Senate and President will follow suit in the near future. Ironically; however, it is too little, too late.
What the Bill Covers
As George Bush was leaving the presidency and the economy near collapse, the former President signed a bill providing an exemption to loan forgiveness income to those homeowners who had received any kind of loan forgiveness income. Said “loan forgiveness income” would include money derived by way of short sale, principle reduction, loan modification, or in a foreclosure where the deficiency was waived on their primary residence. When one receives income from such an exemption one would receive a 1099, meaning that the income received would need to be declared on your tax return and thus taxed. Of course, there are alternatives to paying such taxes, such as pleading with the IRS that you are insolvent and, in fact, many accountants are quite savvy at doing that and therefore possibly removing said income from taxation.
Christmas Coal for Responsible Homeowners?
However, in most circumstances people end up paying the loan forgiveness income if in fact they receive a 1099. As we approach the end of 2014 and reflect on the year in real estate, this past year a substantial portion of the population were put in the stressful situation of deciding how to handle their distressed property. Decisions needed to be made whether to engage in short sales, modifications, or battle foreclosure. Many homeowners acted in a manner that they, and most others, believed to be prudent in their property management as the tax benefit(s) had seemingly run out at the stroke of midnight the previous year. But to everyone’s surprise, Congress is now retroactively stating that any transaction involving the primary residence that occurred in the past year where there was in fact loan forgiveness income will be waived. Now this of course is a delightful holiday carol to the ears of those who were involved in such transactions, but it is an unexpected giant lump of Christma coal in the stocking for others.
Those who attempted to be prudent, opting not to engage in loan forgiveness transactions out of the fear of tax ramifications, have been retroactively moved from the Good List to theNaughty List. In fact statistically we will see that the number of short sales fell off precipitously this past year holding back the entire economy.
Unanticipated (That Should Have Been Anticipated) Consequences
Realtors, lawyers, title companies, architects, engineers, surveyors, homebuilders, as well as banks all were harmed by the fact that there was a substantial decline in short sales. Further, it probably hurt the real estate market by reducing the amount of actual transactions that occurred.
So here we have it: Congress is passing a law that is retroactive that provides no guidance whatsoever to the future conduct of an individual.
In fact, the law again is supposed to expire at midnight 2014. Isn’t that once again too little, too late?
I say Merry Christmas & Happy Holidays to all.
From the trenches,