Home sellers, seek tax experts’ advice

Q: I read your article in (the Jan. 26) Las Vegas Review-Journal, and have a question of my own that I need answered.

I worked through the Nevada Hardest Hit Program and received a principal curtailment mortgage refund of $30,900 from the government’s second version of the Home Affordable Refinance Program. I refinanced my home and just closed the deal.

Is this $30,900 not taxable under the fiscal cliff tax compromise that you are talking about in your Mortgage Forgiveness Debt Relief Act? I would appreciate your answer.

I also would ask what part of the closing costs on a refinance are deductible on one’s income tax forms?

— Patricia P., Las Vegas

A: As you may recall, Congress and President Barack Obama extended this law Jan. 1 as part of the “fiscal cliff” compromise that generated so much national news late last year. The government helped short-sellers and homeowners receiving loan modifications by extending tax relief for one year that forgives mortgage debt in such transactions.

If this act had not been extended — and the same may be true if and when it is allowed to expire next year — thousands of Nevadans who are trying to short sell their homes would face a significant tax burden. Without this legislation, any amount of money a bank writes off in agreeing to sell a home as part of a short sale (or in a principal reduction) becomes taxable when sellers file their income taxes.

Like most homeowners and Realtors I know, I was glad the government extended this tax forgiveness law — at least for one more year.

To help me answer your questions about what may or may not be tax deductible, I consulted Kenneth A. Burns, a longtime tax attorney at the local law firm of Kolesar & Leatham who has years of experience in this area.

“The extension of the Mortgage Forgiveness Debt Relief Act provides much-needed relief for homeowners who refinance mortgages on their principal residence and obtain a principal reduction, but it does not apply to all homeowners,” Burns said. “The relief applies only to those who purchased their homes when the prices were high and then the value of the house dropped below the amount of the original mortgage. The relief does not apply to those who refinanced when home values were high and received cash to pay other bills as part of the refinancing.

“There are other provisions in the Internal Revenue Code that may provide relief which are unrelated to the relief act, such as if the borrower is technically insolvent, or the debt is forgiven in a bankruptcy. It takes a detailed understanding of the facts to know if other provisions might apply if the Mortgage Relief Act does not apply because the original loan was refinanced with the homeowner getting back cash in the refinancing.”

You also asked if you can deduct the closing costs you paid when refinancing your home. Burns said: “Closing costs are generally not deductible, except for interest and real property taxes paid as part of closing costs.”

He added that the points home buyers pay to secure a mortgage “can be considered prepaid interest and may be partially deductible.”

However, he said “fees like title insurance, escrow fees, appraisal fees, recording fees and similar charges are not deductible.”

These issues can be complicated and individual situations may vary. That’s why I advise people to consult a qualified local tax attorney or trusted accountant when they have specific legal or tax questions.

Please send your real estate questions to ask@glvar.org.

Dave Tina is the 2013 president of the Greater Las Vegas Association of Realtors. GLVAR has nearly 11,000 members. For more information, visit www.lasvegasrealtor.com.