SHAWN M. YESNER LEGAL babm.com/legal


Shawn M. Yesner is founder of the Yesner & Boss law firm. He represents clients in residential and commercial foreclosures, bankruptcies, residential and commercial closings, debt collection negotiation, and general corporate matters. yesnerboss.com


20 | APRIL/MAY/JUNE 2012


There are many misconceptions associated with the Act. The main one is that the Act prevents the issuance of forgiveness of debt income (through IRS Form 1099) against a primary residence. That is simply untrue; in situations where more than $600 of debt is forgiven, the lender MUST issue form 1099. Another myth is that the Act applies to all homestead residences; this is again false. There are four requirements to be able to exclude income pursuant to the Act:


LEGISLATIVE UPDATE


There can be no question that the real estate landscape in Florida has changed dramatically during the previous decade. Between 2005 and 2007, short sales were few and far between. Homeowners were more easily able to save their homes, through refinances or simply by selling the house and pocketing the profits or buying a new home.


Today, however, many homeowners are under water (meaning they owe more than their house is worth). Acronyms like HAMP, HARP, TARP, and RMFM are being thrown about by lenders, homeowners, courts, and governments alike; the term “bail-out” no longer applies to aviation; and “occupy” has entered the popular lexicon.


In response, there are various Federal and Florida laws aimed at Florida real property issues. This article discusses three of those – The Mortgage Forgiveness Debt Relief Act, the Florida Mandatory Mediation requirements, and the Florida Legislature’s attempt to speed up foreclosures in Florida.


THE MORTGAGE FORGIVENESS DEBT RELIEF ACT The Mortgage Forgiveness Debt Relief Act of 2007 (the “Act”) was enacted on December 20, 2007, and generally allows taxpayers to exclude discharge of indebtedness income if the income is related to the short sale, foreclosure or deed in lieu of their primary residence.


First, the loan must have originated prior to January 1, 2009. Therefore, income from forgiveness of indebtedness related to loans recently originated will not qualify for exclusion under the Act.


Second, the loan must be for less than $2,000,000 ($1,000,000 if married filing separately for the tax year). Therefore, most Florida homeowners will qualify under this prong of the exclusion test.


Third, the loan must be against the taxpayer’s principal residence. There is some difference of opinion between CPAs and tax professionals as to whether principal residence is defined similarly to the capital gains exclusion (must be principal residence 2 of the previous 5 years) or whether the property is principal residence at the time of the event that creates the forgiveness of debt income.


Finally, the Act applies to forgiven debt used to buy, build or substantially improve the principal residence. The Act also applies to refinances to the extent the refinance paid off the loan used to buy the house or to the extent the refinance was used to substantially improve the principal residence. Therefore, “cash- out refinances” or refinances used to pay off credit card debt, pay off car loans, take vacations, or put kids through school, will not qualify for exclusion under the Act, even if the debt was against the taxpayer’s primary residence.


It should be noted that there are other methods to exclude forgiveness of debt income, but these must be discussed and analyzed by a CPA, tax attorney or other tax professional, and these other methods are not covered by the Act.


Of greatest importance to taxpayers is that the Act is scheduled to sunset on December 31, 2012, meaning the Act will only apply to short sales and foreclosures completed before December 31, 2012. Therefore, to the extent a homeowner is considering it, now would be the time to proceed with a short sale, as there are no guarantees that the Act will extend beyond 2012!


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