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The Silicon Valley Association of REALTORS® joins other local and state REALTORS® associations and the National Association of REALTORS® (NAR) in praising Congress for passing and the President for signing into law sweeping legislation of more than 2,000 pages to fund the Federal Government for Fiscal Year 2016. The new legislation will put an end to the series of stop-gap funding measures known as “Continuing Resolutions” that have funded the government since the start of FY2016 on October 1, 2015. This new bill will expire in September 2016.

A significant piece of the tax legislation includes the extension of a number of expired tax provisions important to supporting homeowners and real estate investment, such as Mortgage Debt Forgiveness, Mortgage Insurance Premium Deductibility, Immediate Expensing of Business Equipment and Certain Real Estate, Charitable Deduction for contributions of real property for conservation purposes, Foreign Investment in Real Property Tax Act (FIRPTA), Energy Tax Credit for New Homes, National Flood Insurance Program.

NAR sent a letter to House and Senate tax-writing committees as the final package was being developed to ask for support on maintaining these key provisions. “These tax extenders offer critical support for consumers, homeowners, commercial property investors and small businesses alike,” said Tom Salomone, 2016 NAR president. “We’re grateful for the leadership shown on this important piece of legislation and look forward to continuing our work in support of homeownership.”

Extending tax relief for mortgage debt forgiveness as a win for REALTORS®, according to Salomone, because this provision protects underwater homeowners from incurring a large tax bill on phantom income in connection with a workout or a short-sale. Since 2007, this tax relief has strengthened individual communities and the broader economy as more distressed homeowners were offered the flexibility to responsibly address an underwater mortgage. The tax extenders deal offers an additional two years of protection covering tax years 2015 and 2016.

The bill also includes a permanent extension of a 15-year cost recovery period for the depreciation of qualified leasehold improvements. This provision ensures that a commonsense cost-recovery period remains permanently in place for improvements made to nonresidential commercial property.

The real estate-related provisions likewise include the renewal of certain incentives to promote energy efficient commercial and multifamily buildings. Similarly, an expired tax credit of between $1,000 and $2,000 for energy-efficient new homes is extended for an additional two years under the bill.

The legislation permanently extends rules allowing small–and mid–sized businesses to immediately expense business equipment, rather than depreciate the equipment over several years. This is important to Realtors who are independent contractors and purchase new computers, copiers, cameras and even vehicles in the course of doing business.

Finally, the tax bill includes changes to the Foreign Investment in Real Property Tax Act (FIRPTA) that will ease restrictions on investment in commercial real estate.

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The income tax exemption on mortgage debt forgiven in a short sale or a workout for principal residences expired at the end of 2013. Without immediate action by Congress, distressed homeowners will have to pay tax on “phantom income” from forgiven debt. Many families have decided not to go through with short sales or seek workouts because of the uncertainty over the status of the waiver. This is not only unfair, but harms families, neighborhoods and communities.

On Wednesday night, the United States House of Representatives passed the bill containing the income tax exemption on forgiven mortgage debt and other expired tax provisions by a vote of 378-46, but the United States Senate has not yet voted on the measure. The National Association of REALTORS® (NAR) is urging all members to contact their senators in Congress and have them extend this tax relief now!

  • Despite significant market recovery, more than 5 million are still “under water.”
  • Nearly 1 million households are seriously delinquent on their mortgages or in foreclosure.
  • Mortgage debt forgiveness tax relief is vital for these families.

TAKE ACTION NOW

California Association of REALTORS® President Kevin Brown announced this morning the successful outcome of C.A.R.’s work with U.S. Senator Barbara Boxer (D-CA) to protect distressed homeowners from debt relief income tax associated with a short sale in California. As part of this effort, Senator Boxer requested the Internal Revenue Service (IRS) to provide guidance on whether mortgage debt forgiveness in a lender-approved short sale would be taxable income under federal law, given California’s recent non-recourse laws for short sales, which were hard fought victories by C.A.R.

The IRS has clarified in a letter that California’s troubled homeowners who sell their homes in a short sale are not subject to federal income tax liability on “phantom income” they never received. The IRS recognizes that the debt written off in a short sale does not constitute recourse debt under California law, and thus does not create so-called “cancellation of debt” income to the underwater home seller for federal income tax purposes. This clarification rescues tens of thousands of distressed home sellers from personal liability upon expiration of the Mortgage Forgiveness Debt Relief Act of 2007 on December 31, 2013.

C.A.R. is seeking a similar ruling from the California Franchise Tax Board (FTB), which has been awaiting the IRS action. C.A.R. anticipates the FTB will act promptly. Short sales may raise other tax issues and, as always, homeowners should speak with their tax professional regarding the tax consequences of a short sale.

In order to conform state law to the federal law that recently passed extending mortgage debt forgiveness, the California Association of REALTORS® (C.A.R.) is sponsoring Senate Bill 30, so California homeowners on the brink of foreclosure can get much-needed debt relief.

One of the major successes Congress reached in the “fiscal cliff” negotiations was the extension of the Mortgage Forgiveness Debt Relief Act for another year. The measure will continue to exempt from taxation mortgage debt that is forgiven when homeowners and their mortgage lenders negotiate a short sale, loan modification (including any principal reduction) or foreclosure.

While debt relief has been extended at the federal level, the state exemption expired at the end of 2012, so forgiven mortgage debt is considered taxable state income for now. SB 30 (Calderon, D-Montebello) will extend the sunset date in California law to January 1, 2014. Upon its passage, the measure will be retroactive to January 1, 2013.

Senator Debbie Stabenow (D-MI) has introduced S. 2144, a bill that would make the mortgage debt forgiveness rules permanent. The rules that currently provide relief for homeowners on short sales, foreclosures or loan modifications expire December 31, 2012. This relief is essential to affected homeowners so they will not have to pay tax on the forgiven debt.

A companion bill in the House will be introduced soon. See additional information here.

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