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This Could Get Short Sellers Moving – No More Tax Break?

Posted on Monday, February 06, 2012

Yesterday at our open house on Clemson Street in Naples a potential buyer was asking me about short sales. He was new to Naples and had not looked for real estate anywhere in a while. His notion was to avoid short sales and foreclosures as they seemed too complicated and time-consuming. Not so fast – particularly those short sales.

Remember in a short sale you are negotiating twice – once with the seller and then when a price is agreed the seller turns around and tries to sell the idea to the bank. If all parties agree the seller may benefit from a reduction in the amount actually owed to the bank – a taxable event in the eyes of the IRS as the seller received benefit in the loan amount forgiven.

The tax forgiveness part of this may be coming to an end in 2012. According to Florida Realtors “Through Dec. 31, 2012 … the federal government forgives any tax liability associated with forgiveness of a mortgage loan.” They go on to report this may all be coming to an end at the end of the year.

The reason this may be a big deal in our opinion is sellers in a short sale position may be more motivated in the coming months to negotiate and sell as this tax deal expires.  Let’s run the numbers on this one.

Let’s say the seller is looking at $200,000 in loan forgiveness on that highly leveraged property he bought a few years ago and let’s say he is in the 30% tax bracket. If he sells in 2012 he enjoys a $60,000 tax break ($200,000 loan amount forgiven, or taxable benefit x.3).  If he sells in 2013 maybe not. How many times have we seen negotiations between buyer and seller come down to a few thousand dollars?  Think what $60,000 might mean. This tax stuff suddenly looks important.

If you are working with a seller in a listing appointment in a potential short sale discuss the possible expiration of the tax break in 2012 with them – could this induce them to list their property for less or consider a price reduction on a previously listed property?When working with buyers would you consider submitting an understanding of this tax matter with any bid to help facilitate a sale?

A couple of caveats on this one. We are not tax experts and do not give tax advice so consult a tax professional before proceed further on this one.  Also, everyone’s tax position and buy/sell motivations differ so this may or may not matter. Also, these tax incentives have a habit of finding extensions into future years so the 2012 deal may live another year or more. But, these are good things to know and worth sharing with buyers and sellers.

Tell us what you think about all this and have a great day.
No legal, investment, or tax advice is being given in this Blog.  Consult with legal, financial and tax professionals before acting on any real estate transaction.  Actual real estate price and sales results are subject to market forces and are not completely predictable. The writings of this Blog are intended for the sole use of our clients.

Mark Goebel, PA is a REALTOR with Coldwell Banker on 5th avenue in Naples, Florida with 35+ years of visiting and living in Naples. After 25 years at Accenture, Mark retired as a managing director and spends his time helping non profits and building a Naples real estate team with his wife Nan. Talk to Mark and Nan about life in Naples and why they chose this place to live full-time over all others and enjoy Naples real estate.

Mark Goebel, PA
Mobile: 239.595.3921
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