Florida Tax Attorney Blog

The Florida Constitution (F.C.) (Article 10, Sec. 4) protects homestead property from levy of creditors of the owner. The F.C. provides that homestead property should be liberally construed in favor of the homesteader against the creditor. The person claiming the homestead exemption must be a Florida resident who establishes that he or she made, or intends to make, the real property his or her permanent residence.

A permanent residence is the address listed on your driver's license, the place from which you register your cars, or file your income tax return or vote. If this property is not your permanent residence, or you are not a resident of Florida, you must notify the Property Appraiser. It is also important to note that only natural persons may claim homestead (not corporations or other like entities). If you are receiving a residency based exemption or benefit in another county, state or country; you are not eligible for exemption.

Homestead must be established before levy of the judgment creditor. However, homestead is subject to forced sales for property taxes, mortgages on the property, and mechanics liens arising from improvements of the property. Homestead inures to the benefit of the surviving spouse and minor children. Homestead consists of a ½ acre of contiguous land including a residence within a municipality. Outside of a municipality one may claim up to 160 contiguous acres. Homestead also protects personal property to the value of one thousand dollars.

If homestead is sold, the proceeds are considered to retain homestead exemption provided the owner has good faith intent to reinvest the proceeds in another homestead within a reasonable time. In other words, if you moved to a new home, the homestead exemption does not transfer automatically. To receive a new or additional exemption, you must make the application before March 1, of this year. If you have moved from another home within the state of Florida and you had homestead on your previous property, you may be eligible to bring your homestead savings with you.

To be eligible you must apply for and receive a homestead exemption on your new property within two years of leaving your previous homesteaded property and submit a (DR-501T) Homestead Assessment Difference form to the Property Appraiser's Office. However, it is important to note that if the homestead is abandoned, the protection may be forfeited.

Continue reading "Are You Eligible For The Florida Homestead Exemption?" »

Every person who owns and resides on real property in Florida on January 1 and makes the property their permanent residence is eligible to receive a homestead exemption up to $50,000. The first $25,000 applies to all property taxes, including school district taxes. The additional exemption up to $25,000, applies to the assessed value between $50,000 and $75,000 and only to non-school taxes.

When filing for the first time, the homeowner should be prepared to answer these questions:

1. In whose name or names was the title to the dwelling recorded as of January 1st?

2. What is the street address of the property?

3. How long have you been a legal resident of the State of Florida? (A Declaration of Domicile or Voter's Registration will be proof of date before January 1st).

4. Do you have a Florida license plate on your car and a Florida driver's license?

5. Were you living in the dwelling on January 1st (January 1st is the date on which permanent residence is determined)?

The deadline for filing without a fee is March 1st. All applicants must have:

1. A valid Florida driver's license (a license valid only in the state of Florida is not acceptable); and

2. A Florida voter's registration or a notarized, recorded Declaration of Domicile.

Has your Florida debt been forgiven? Don't be surprised if the IRS considers this income!

Historically, any discharge of indebtedness or other relief from debt is taxable as income under the Internal Revenue Code (IRC). In general under the IRC, when a lender decides to forgive all or a portion of a borrower's debt and accept less than the original amount owed, the forgiven amount is considered as income for the borrower and may be taxed.

However, the Mortgage Debt Forgiveness Relief Act of 2007 was enacted to provide relief to qualifying homeowners who would have otherwise suffered a tax consequence because of the forgiveness of mortgage debt. The Mortgage Debt Forgiveness Act has paved the way for many additional amendments to help taxpayers exclude qualifying debt that has been forgiven from income and eliminate potential tax liabilities. Recently the Emergency Economic Stabilization Act of 2008 has extended the tax relief until 2012.

This benefit is only available to qualifying taxpayers. Discharged acquisition indebtedness is only excludable if it is incurred with respect to the taxpayer's principal residence (Code Sec. 108(h)(2), as added by P.L. 110-142). The term "principal residence" as it applies here has the same meaning as used in determining whether the exclusion under Code Sec. 121 applies to the gain from the sale of the residence (Code Sec. 108(h)(5), as added by P.L. 110-142). Under regulations issued pursuant to Code Sec. 121, whether a residence is the taxpayer's principal residence depends on an examination of the facts and circumstances, such as the taxpayer's place of employment and mailing address (Reg. §1.121-1).

Continue reading "Can the IRS Potentially Consider Your Florida Debt Forgiveness Income?" »

If the taxpayer applies under IRC Section 6325(b)(2)(B), there will be a determination of the amount required for a discharge or a determination that the tax lien is valueless within 30 days from the date of the application. As a caveat, the IRS notes that if an application is made under IRC Section 6325(b)(2)(B), the certificate of discharge will be issued, once the foreclosure proceeding has been concluded.

Although IRC Section 6325(b)(2)(B) may be used to apply for discharge with regard to short sales, the provision is directed mainly at foreclosures. An application for discharge under this section should explicate that a short sale in lieu of a foreclosure proceeding will not change the position of the IRS in relation to the property or the taxpayer.

The taxpayer must apply for discharge by submitting a copy of the proposed escrow agreement and completing Form 14135. It is important to remember to submit the application at least 45 days before the transaction date that the certificate of discharge is needed. Along with the application, the taxpayer must submit a deposit or a bond in the amount of liability owed to the United States. IRC Section 6325(4)(B).

To apply under this section, the taxpayer should provide the description of the property with a copy of the deed. The application should include: when the property is to be sold, any and all liens to the property (junior and senior to the tax lien), and an itemization of all costs. In the application, the taxpayer should state whether foreclosure proceedings are expected to begin or are pending.

Finally, it is also advisable that an application include an appraisal by a disinterested third party. Although this requirement applies to taxpayers applying under a different section, the value of the property is what is at issue. IRS Publication 783 offers instruction on how to apply for a certificate of discharge from a federal tax lien.

Continue reading "Discharge of IRS Tax Liens In Connection With A Florida Short Sale Part III" »

Federal tax liens are not automatically discharged upon short sale. The IRS has the power to object and prevent the sale if there is a federal tax lien on the property. A short sale will not necessarily discharge a tax lien but the taxpayer has the option for applying for such discharge if certain conditions are met.

A short sale would entail the lender reducing the outstanding balance on the mortgage. The property would then be sold for less than the remaining balance on the mortgage. The proceeds of such a sale would be applied against such balance.

To begin the short sale process, the borrower and lender enter into negotiation in order to discount the mortgage and whether the sale of such property will be in full satisfaction of the debt. However, the lender holding the first mortgage on the property may not be the only party that has a lien on the property. Other parties with liens on the property will have to approve the short sale.

Due to the requirement that junior lien holders approve the short sale the IRS may prevent the sale or delay the process, which may result in having the property foreclosed before a resolution between the parties. To mollify this risk, it would be in the taxpayer's best interest to apply for the discharge of the lien as quickly as possible.

IRC Section 6325 provides the parameters governing when a taxpayer may seek discharge of the tax lien. The most relevant IRC statute for a short sale would be IRC Section 6325(b)(2)(B) which provides that a discharge may be issued when the government's interest has no value.

This would be the case where the debts senior to the tax lien exceed the sale price or fair market value of the property, which would necessarily be the case in a foreclosure of the property. To recover under this section in the case of a short sale, the taxpayer would have to show that the government's interest has no value. To effectuate this, the taxpayer must file an application for Certificate of Discharge of Property from Federal Tax Lien.

Continue reading "Discharge of IRS Tax Liens In Connection With A Florida Short Sale Part II" »

The IRS uses powerful methods to collect unpaid taxes. At the heart of the IRS collection procedures is the federal tax lien which arises automatically after the conditions precedent to the creation of the tax lien have been satisfied, i.e. - assessment of tax liability, demand for payment, and failure to pay.

Once these requirements have been met, the tax lien is automatically in place, under Internal Revenue Code (IRC) §6303(a), and enforceable against the taxpayer, according to IRC §6321. In essence, once a person fails or neglects to pay any federal tax after the IRS's demand, then the amount of the tax liability automatically becomes a lien in favor of the United States from the time of assessment.

IRC § 6321 also asserts that the lien automatically attaches to property and rights to property, whether real or personal. The tax lien attaches not only to all property and rights to property belonging to such person at the time during the period of the lien, but also to any property or rights to property acquired after the lien arises. For example, in Florida the bankruptcy court has held that the United States had a valid tax lien against the funds of a Chapter 7 debtor's bank accounts because the IRS had assessed the tax, the debtor had refused to pay the taxes, and therefore the tax lien existed against all properties, including the bank accounts which were opened after the lien arises. In re Morgan, 213 Bankr. 609 (Bankr. MD Fla. 1997).

A federal tax lien can be perfected by filing notice with states and any other creditors explaining that the IRS is first in line to receive payment as a result of back taxes. In addition, the tax lien is perfected against certain third parties if a Notice of Federal Tax Lien is recorded or filed. Florida state law controls where the federal tax lien must be filed to be effective and to give proper notice. IRC § 6323(f).

Continue reading "Discharge of IRS Tax Liens In Connection With A Florida Short Sale Part I" »

Internal Revenue Code (IRC) § 121 provides an exclusion from gross income for gain from the sale or exchange of property if, during the five year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer's principal residence for at least two years. IRC § 121(a).

Under the current tax laws, the amount of the exclusion is $250,000, unless a husband and wife file a joint return for the taxable year of the sale, in which case the exclusion is $500,000, if the husband and wife meet the following requirements:
(i) either spouse meets the ownership requirements of subsection (a) with respect to such property;
(ii) both spouses meet the use requirements of subsection (a) with respect to such property; and
(iii) neither spouse is ineligible for the benefits of subsection (a) with respect to such property by reason of previously using the exclusion within the previous two years.
IRC § 121(b).

The exclusion applies, with regard to a joint return, if either spouse meets the ownership and use requirements with respect to such property. IRC § 121(d)(1). An individual will also be treated as using property as such individual's principal residence during any period of ownership while such individual's spouse or former spouse is granted use under a divorce decree. IRC § 121(d)(3).

Continue reading "Do You Qualify For A Principle Residence Exclusion On The Sale Of Your Home? " »

A taxpayer should be very wary when entering into a short sale without considering the tax consequences. A short sale looks better than foreclosure because the taxpayer is forgiving a debt and the lender essentially agrees to take the loss. However, although the debt is forgiven to the lender, the IRS does not generally afford the taxpayer such favorable treatment.

Historically, when a debtor is forgiving a debt by their lender, the amount forgiven will be considered income and will be subject to tax. Crane v. Comm'r, 331 U.S. 1 (1947). This applies to recourse mortgages as well as non-recourse mortgages. Comm'r v. Tufts, 461 U.S. 300 (1983). However, a recent law was passed which allows for certain types of forgiven debts to not be subject to income tax. The Mortgage Debt Forgiveness Act, passed in 2007, allows for relief for some homeowners who had their debts forgiven from 2007 to 2009. However, not every taxpayer qualifies under this new law and a number of conditions must be met to benefit.

A taxpayer may fill out IRS Form 982 to apply for a reduction of tax attributes due to discharge of indebtedness and for an adjustment to their basis, as provided in Internal Revenue Code Section 1082. Normally, a mortgage is included in the purchase price of a home, and therefore included in the basis. Upon sale of the property, the basis would be a part of the computation for capital gains for tax purposes. In making a determination in this respect, the IRS cites Regulation 1.1017-1.

The IRS may consider each taxpayer and determine whether a relief from indebtedness by a lender may also qualify for relief from taxation on that debt forgiveness. However, this is not the default treatment of forgiveness of mortgage indebtedness.

Consequently, taxpayers should consider carefully whether they might qualify for this relief. If the IRS determines that a taxpayer does not qualify, such person would be assessed with a tax, in accordance with the character of the property. Therefore, if a taxpayer short sells a property and is forgiven a mortgage of $100,000, that taxpayer could be liable for the capital gains of 15 percent (based on current tax rates for 2010) on that $100,000, which would be a $15,000 tax liability.

Continue reading "Discharge of Indebtedness Income from Short Sale - Will You Receive a 1099?" »

Ordinarily relief from indebtedness is taxable as income under the Internal Revenue Code. However, The Mortgage Debt Forgiveness Relief Act of 2007 was passed to benefit certain taxpayers, and excludes from income debt forgiven in the years 2007 through 1012. This may encompass up to $2,000,000 in debt forgiveness. One of the ways you may qualify for this tax benefit is through a short sale on your home. There are a variety of factors to consider in determining whether you may benefit from this tax act.

In a short sale, the lender agrees to accept less than the total amount due under the mortgage. However, not all owners or all properties qualify. In general, the following conditions must be met in order to qualify for a short sale:

1. The market value of the property has dropped less than the unpaid balance due to lender;
2. Mortgage is in or near default status;
3. Seller has fallen on hard times (does not include bad purchase decision,buying another home,moving into apartment etc.) (does include unemployment, divorce, medical emergency, bankruptcy, death); and
4. Seller has no assets (if assets, the lender may deny or may approve it on the condition that seller later pay back the difference).

In addition to the above qualifications, a purchaser must be found and, most importantly, the lender must agree to sell the property in a short sale. It is important to note that the seller does not have to be in default before a lender will consider the short sale. Lenders may consider this course of action if the seller is current, but the value of the property has dropped substantially.

Short sales have practical, legal, and tax ramifications including, but not limited to the following:

1. A short sale will show up on the person's credit report and drop his/her FICO score. Sellers can ask that the lender not report the adverse action to the agencies, but it is up to the lender.
2.The lender could potentially still seek a deficiency decree for the unpaid balance; and/or
3. The IRS could potentially consider the debt forgiveness as income. However, the passing of the Mortgage Forgiveness Debt Relief Act of 2007 should greatly reduce or eliminate this concern.

Continue reading "Tax Obligations on the Short Sale of a Florida Property" »