Since You Didn’t Ask - Debt Forgiveness and Tax Relief

Sometimes we (”we” being one-dimensional real estate agents) assume that our clients know something simply because we are on board. This week, I had conversations with two separate people during which I was reminded that not everyone is all-consumed with matters of real estate. What may be common knowledge to us may not be so for our clients who lead more normal lives with more balanced interests.

So, today I bring you a new twist on our old version of “Ask the Brokers.” I call it “What You Might Have Asked the Brokers Had You Known the Question.”

Q: What does the Mortgage Forgiveness Debt Relief Act of 2007 mean to me?

A: This bill was signed into law on December 20, 2007. For homeowners in a mortgage mess, the Debt Relief Act was President Bush’s Christmas present to you.

Prior to December, any debt forgiveness on the part of your lender, such as might occur during a short-sale or foreclosure, came with the potential for the “gift” to be considered gross income and subject to Federal income tax. Under the new law, forgiven debt on a principle residence is not subject to this taxation. There is one caveat - Any forgiven debt will be subtracted from the basis of the property, so in theory a homeowner could find themselves with a taxable gain, but I suspect these cases will be rare, since Federal law still allows exemptions of $250,000 for individuals and $500,000 for married couples.

As a somewhat unrelated aside, this law also gives a surviving spouse two years after the death of a spouse to sell a principle residence and still qualify for the full $500,000 married capital gains exemption.

Q: Can I lower my property taxes?

A: You can not lower your property tax rate, of course. The rate is set by law. You may, however, be in a position to lower the assessed value of your property which is the amount on which you are taxed.

In California, only when a property transfers (is sold), or in the case of new construction, is completed, is it reassessed. For ownership transfers, the purchase price becomes the new assessed value. Proposition 13 limits subsequent increases in the assessed value to 2% annually, based on the California Consumer Price Index. Our California property tax rate is 1% plus any bonds, fees, or special charges.

In an environment of declining home values, many homeowners are now finding that the market value of their home is less than when it when it was purchased. The County of San Diego has a process for dealing with these situations wherein the homeowner may appeal their assessed value.  

From the San Diego County Tax Assessor’s web site:

Under State law, if the current market value of your property (recent comparable sales) falls below the assessed or taxable value as shown on your tax bill, the Assessor’s Office is required to lower the assessment. This type of property tax relief generally applies to recently purchased property. There are two periods during the year in which the taxpayer may appeal their assessed value for a temporary reduction:

(1) Between March through May:

During this period, the taxpayer may submit a written request to the Assessor, indicating their opinion of value and providing supporting documentation, such as sales of comparable properties or a recent appraisal. For more information, call (858) 505-6262.

(2) Between July 2 and November 30:

During this period, the taxpayer must file an application form. Appeal forms can be obtained and must be filed with the Clerk of the Board at 1600 Pacific Highway, Room 402, San Diego, CA 92101-2471. For more information, call (619) 531-5777.

So, there you have it, since you didn’t ask.