What's the future of Short Sales
Imagine buying a house for much less than its market value only to discover you’ll incur an additional tax bite of hundreds or thousands of dollars.
State revenue collectors now say buyers of short sales, the term used for houses that sell for less than the mortgage owed on them, must pay more in real estate transfer taxes called documentary stamps.
Short sales, a last-ditch effort by some distressed sellers to rid themselves of a house rather than lose it to foreclosure, are on the rise as the state grapples with the worst housing market in decades.
In a short sale, lenders agree to the transfer of a property and generally forgive the unpaid mortgage amount, though some require a promissory note from the seller for the unpaid balance.
In an August letter to a title insurance attorney, a tax specialist for the state Department of Revenue (DOR) said buyers should pay transfer taxes on the short-sale purchase price plus the forgiven debt amount.
Whether the department’s position will stand is the subject of considerable discussion among real estate attorneys and title insurers. The department is expected to issue what’s called a binding opinion within two weeks, said spokeswoman Renee Watters.
The taxation issue has prompted even more questions about short sales. Should they be considered when county property appraisers calculate values for tax assessments? How should short-sale purchase prices be disclosed to property appraisers now that state law has eliminated the need to report purchase amounts? And how much should buyers and sellers be told about the tax issue on forgiven debt?
“It’s gained a life of its own over the last couple of weeks,” said Bill Richardson, district sales manager for the Keyes Co.’s Boca Raton office.
And if the department maintains its position on short-sale taxation, there is talk of a legislative effort to reverse it.
The department’s position ultimately “could be really problematic for the short-sale industry,” said Greenberg Traurig tax attorney Marvin Kirsner in Boca Raton.
After learning of the state’s position, Kirsner advised the buyer of a Miami Beach condo to comply. Instead of paying $2,010 in documentary stamps on the $335,000 purchase, she paid $3,660 on the purchase price plus $275,000 in forgiven debt, or $610,000.
Kirsner, who declined to identify the client or property, now is asking the state for guidance through a “technical assistance advisement” and is seeking a refund for the buyer.
Controversy over the issue arose after department tax specialist Myra McKown wrote Stewart Title attorney Victoria Behm in Safety Harbor that short-sale buyers must pay taxes on the purchase price plus the forgiven debt.
Behm, one of the title insurance underwriter’s four statewide legal advisers, requested the opinion in late July. Through an assistant, she declined comment.
In her Aug. 7 letter, McKown offered an example: If a seller owes $200,000 on a house that sells for $150,000, the lender would forgive $50,000 of the mortgage debt.
But the documentary stamps would be calculated on the total $200,000 balance of the mortgage rather than the purchase price, McKown said.
Based on the customary fee of 70 cents per $100, the buyer would pay $1,050 in taxes on the $150,000 purchase price. On the full $200,000, the tax bite would be $1,400.
Miami-Dade County is the state’s sole exception in fees charged, where the rate is 60 cents per $100 for a single-family residence. That’s the rate applied to the condo bought by Kirsner’s client.
McKown’s letter has been widely circulated among real estate and tax attorneys, and title insurers. That prompted numerous inquiries to the department, which then issued an advisory that the specialist’s letter was her opinion only and not the department’s official position.
McKown also wrote Behm on Aug. 18 saying that her earlier letter was her opinion only and not the department’s official stand. The department, McKown said, was still reviewing “the correct application of Florida’s tax law to these types of sales.”
But prior cases and rulings justify the department’s position, Kirsner said.
“They are looking at it, or this one person at DOR is, as if it is a deed in lieu of foreclosure, and in that case, it is clearly subject to doc stamps on the total amount forgiven,” he said.
In a deed in lieu of foreclosure, a borrower who can’t make mortgage payments assigns title to the house to a lender.
Because of a three-year statute of limitations, there is a question of whether the revenue department could retroactively include prior short sales.
Although sellers in Florida typically pay transfer fees, Florida law makes all parties in a real estate transaction liable for the taxes. However, revenue agents typically go after buyers because they can be located more easily.
There currently are no administrative rules regarding taxation in short sales, and the closest any come to addressing the issue date to 1991, said Greenberg Traurig attorney Burt Bruton in Miami.
Prior to that, forgiven debt involving a deed in lieu of foreclosure wouldn’t be taxed if the seller was insolvent.
“It’s possible the department could go back to that position,” he said.
In 1991, the revenue department removed the insolvency exception and required tax payment on the purchase price and debt for deeds in lieu of foreclosure.
On the other hand, the department’s position is contrary to bankruptcy codes that give insolvent sellers a tax break, said Bruton, chairman of the legislative review committee of the Florida Bar’s Real Property section.
According to a 2008 federal provision, debt reduction on a primary residence is excluded from being considered as gross income and won’t be taxed, Bruton said.
Effective until Jan. 1, 2010, the provision is intended to address the mortgage crisis, he said.
Real estate attorney Marshall Emas, a partner in Shutts & Bowen in Fort Lauderdale, raises another concern.
Following the June repeal of part of Florida’s excise tax statue, parties in a sale no longer have to submit a form to the state declaring the home’s sales price or whether the transaction was the result of a foreclosure. The state also is not told if the transaction involves a short sale.
The lack of a sales price on the deed makes it difficult for revenue collectors to determine property values for tax assessments.
“Some [property appraisers] have forms, some don’t. So there may not be uniform disclosure,” Emas said. “I would have to explain to a client that there seem to be two different pieces to base consideration on in a short sale. One is the cash amount and the second is the forgiveness of debt. So where you might say the consideration is the cash, [the department] says no.”
Ron Gunzburger, general counsel to the Broward County Property Appraiser’s Office, said his staff won’t even attempt to answer questions about reporting sale prices until the revenue department releases an official position on the taxation question.
The issue has raised other questions, Gunzburger said.
Buyers won’t know what amount has been forgiven in a short sale because they aren’t part of the negotiations. And because already-insolvent sellers won’t receive any proceeds from the sale, it is likely payment of the extra transfer fees would fall upon buyers, said Keyes’ Richardson.
“We’re disclosing [the taxation issue] to buyers. And the Florida Association of Realtors has asked the department for a clarification,” he said. “It’s a big issue.”
But the Realtors also are concerned that lenders will ask agents to pay the additional transfer fees out of their sales commissions, Richardson said.
“Lenders in effect become the seller in a short sale, so it’s just another cost the lender will have to pay, or it may make the lender tack it on the [price] and make the deal a little more expensive for the buyer,” he said. “Or they could say cut the commission.”
The Broward appraiser’s office, meanwhile, has asked the revenue department for a ruling on whether short sales can be used to determine property values for tax assessments.
The office excludes foreclosures and disqualifies short sales until the end of the year, when calculations of tax assessments begin.
“We go subdivision by subdivision, and, if there is a predominance of short sales, that would become the market,” Gunzburger said. “That’s a realistic view of valuation, but we need the department’s opinion.”
The office also has asked the department to advise how the amount of the debt forgiven can be determined.
Without that knowledge, misrepresentation could take place, Gunzburger said.
“This is much more complicated than it appears on the surface,” he said.
Daily Business Review - September 03, 2008 - By: Terry Sheridan