When Florida homeowners decide to pursue a loan modification or a short sale on their home, what is supposed to be debt relief may wind up being an indicator of financial troubles to come. Through a federal waiver implemented in 2007, many homeowners have been absolved from having to pay income taxes on the difference between their loan amount and the amount of debt cancelled. Simply put, the IRS considers the value of money that the homeowner saved through a loan modification or short sale as income, which is taxable.
Unfortunately, the federal waiver may expire in January. If it does, many Florida consumers may incur additional debt via a tax bill next year. If the waiver does expire, as many as an estimated 130,000 homeownersin the Orlando area alone could be impacted financially.
The amount of taxes that homeowners may owe if the waiver expires could be staggering. For example, if someone had to sell their home for $100,000 less than what they still owe on the mortgage, they may have to pay taxes on the difference between the sale amount and the amount still owed. For fixed income homeowners relying on a loan modification for relief, or those who lost their home through a short sale, this amount can be unbearable. While there may be options to work out a payment plan with the IRS, there will be no way to expunge the amount of taxes owed without the waiver.
Mortgage debt relief options, such as loan modification or short sale, can be beneficial to many Florida homeowners. Unfortunately, even if mortgage debt is settled successfully between the homeowner and the lender, tax liability is a separate issue that can result in additional debt. When debt begins to mount in spite of one’s best efforts to reduce it, many Florida consumers may find it beneficial to seek additional assistance. In some cases, bankruptcy may be a viable option to consolidate or eliminate certain debts, giving the consumer a chance to start fresh. Every individual’s situation is different, which is why it may greatly benefit Florida consumers to investigate their individual options.
Source: orlandosentinel.com, ‘Underwater’ homeowners likely to face new tax bill, Mary Shanklin, Dec. 17, 2013