A recently-expired homeowner tax exemption could spur a new wave of bankruptcies across the country, local experts say.
The Mortgage Debt Relief Act, which sunset Jan. 1, exempted borrowers from having to claim bank-forgiven debt like unpaid loan amounts from short sale or foreclosure, also known as “phantom income,”on their tax returns.
Without the exemption, homeowners could owe thousands more in federal taxes and might opt to ride out a foreclosure, according to Adam Seligman, a West Palm Beach real estate attorney with Ward Seligman. He expects a new wave of foreclosures is coming, the Palm Beach Post reported.
“People are asking me why should they cooperate with the bank on a short sale when there is no more benefit,” Seligman told the Post. “Most people want to work with the bank, but if they do that and still get tagged with a $50,000 tax bill, what’s the point?”
Even if a bank offers a waiver for the debt, homeowners might refuse it. They would rather the bank come after them than the IRS for unpaid taxes, experts say.
“The IRS doesn’t go away,” Jack McCabe, head of a consulting firm in Deerfield Beach, told the Post. [Palm Beach Post] — Angela Hunt