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Congress Addresses Florida Short Sales and Foreclosures in Fiscal Cliff Bill

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At the last minute, as part of the "Fiscal Cliff" Bill (HR 8,E.A.S), Congress addressed the extension of tax relief for homeowners with Short Sales or who are in Foreclosure

Did you miss getting your short sale approved and closed before December 31 of 2012? Be thankful that Congress works even slower and less efficiently than your lender. On January 1, 2013 both houses of Congress passed, what is commonly known as the Fiscal Cliff Bill.

Normally when a creditor forgives debt, this forgiven debt is taxable. So on a short sale, where the bank may be forgiving $100,000's of debt, the potential tax liability is tremendous. Thankfully this bill continues the exemption for the amount forgiven on your primary residence, on the loan that was originally taken out to purchase the home, or on a refinanced loan but not including amounts if additional cash was taken out.

With South Florida's continued depressed market, this extension has been greatly needed. Burdening homeowners with tax bills of Tens or Hundreds of Thousands of dollars, would cause even greater stress on our struggling economy. In South Florida, where a large number of homeowners are underwater, this tax exemption extension is even more important. One more year probably won't be enough to clear out all the bad inventory but it's a start. Housing prices are starting to pick up in the area, and more buyers are coming out.

If you are currently considering, in the process or have completed a short sale, be sure to check out My Short Sale Nightmare, for a forum to discuss problems and solutions involved in Short Sales.

The Bill reads in part:

SEC. 202. EXTENSION OF EXCLUSION FROM GROSS INCOME
13 OF DISCHARGE OF QUALIFIED PRINCIPAL
14 RESIDENCE INDEBTEDNESS.
15 (a) IN GENERAL.—Subparagraph (E) of section
16 108(a)(1) is amended by striking ‘‘January 1, 2013’’ and
17 inserting ‘‘January 1, 2014’’.

This ammends the original text of 26 USC Section 108:

Gross income does not include any amount which (but for this subsection) would be includible in gross income by reason of the discharge (in whole or in part) of indebtedness of the taxpayer if—
(A)the discharge occurs in a title 11 case,
(B)the discharge occurs when the taxpayer is insolvent,
(C)the indebtedness discharged is qualified farm indebtedness,
(D)in the case of a taxpayer other than a C corporation, the indebtedness discharged is qualified real property business indebtedness, or
(E)the indebtedness discharged is qualified principal residence indebtedness which is discharged before January 1, 2013.
 
In Plain English:
 
The deadline for the debt foregiven by your lender to not be considered taxable income has been extended from December 31, 2012 to December 31, 2013.**
 
This is especially important for owners in Florida, as values are still severally depressed and many homeowners are upside on their mortgage. Having a homeowner pay taxes on money they never received (this exmeption does not cover money the owner received) for an asset they aren't keeping, would have pushed more people into bankruptcy, and further hurt the housing market.
 
**Other restrictions apply, please consult your tax advisor.

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