I will do my best to explain how we’ve managed to get a nearly $15k tax refund for 2013, the year in which we made more money than ever. I do not fully understand it but know it required three atypical financial events to coincide in the same tax year:
- A short sale that enabled me to realize prior losses related to the property
- Bank of America selling the mortgage loan to Seterus, pushing the short sale from tax year 2012 to 2013
- Also realizing 100% of an AMT credit in the 2013 tax year, from an AMT over payment several years ago
In December 2011, I began to prepare for strategic default on a deeply underwater, usually-rented-but-not-nearly-covering-the-mortgage condo in Chicago, where I have not lived for many years. I did a lot of research, contacted my tax accountant before anyone else, and stopped paying my mortgage on June 1, 2012. The short sale of my condo was completed in January 2013.
So, we have the short sale and prior losses. I knew I would owe income tax on the $100k+ difference between the mortgage balance and the eventual short sale price, even if I didn’t receive a 1099 (I didn’t). But I also knew, from prior tax years, that I would have approximately $65k in condo losses that I could only realize (i.e. get back in future tax filings) when a “taxable event” took place. The sale of a property, even a short sale, counts as a taxable event. This meant that the income tax burden would be on $45k rather than $100k+. That came to pass.
I do not understand exactly how the condo losses were calculated over the past many tax years (that’s what my tax accountant is for). I only know it involves a complicated combination of property depreciation, expenses and renting at a loss, and possibly more.
But before that was the loan sale that pushed the short sale into tax year 2013. I never thought I’d be grateful for the first scheduled short sale being derailed but I am now! On the day of the final walk through prior to the first scheduled short sale closing, I learned that Bank of America had sold my mortgage loan to Seterus. The very inconvenienced buyer understandably walked away and we had to start the short sale process all over again. If Bank of America had not sold my loan to Seterus, the short sale would have closed in tax year 2012 and would not have resulted in a tax refund, because for that we also need…
An AMT credit, and all of it in one year. I don’t think I ever blogged about this (I was far too upset) but we unexpectedly fell into AMT territory for only the 2009 tax year. Yes, we had a nearly $60k tax bill for our first married-filing-jointly tax year, which was also the year when my dad and husband were unemployed, my condo didn’t have a renter for part of the year, I had to pay for my last year of part-time grad school tuition and (as you can probably guess from a glance at the Debt Snowball column) we did not have anywhere near $60k just sitting around. I sobbed in front of the tax accountant. How could we be living on one income and owe $60k?!
I’ll tell you how: because my almost-husband had exercised some stock options at the failing, privately held company that he would end up leaving and, in Magical Taxlandia, handing your employer a check to exercise stock options is treated like a sale of stock options – even if you didn’t, even if you never got a penny from them. We were extraordinarily fortunate to be able to sell enough of the shares of stock on the private market (via Sharespost) to cover our tax bill, otherwise I don’t know what we would have done.
You can get AMT over payments back as a tax credit but it can take several years, which is also what happened for us in 2013. The tax credit also came back in a single year rather than be spread out over many years.
And that’s how we find ourselves with a high combined income and a substantial tax refund.
I used to say, of my strategic default, “If I’d known a short sale could be so financially beneficial, I’d have done it years ago.” Fortunately, I didn’t! There was no better year for a short sale than 2013.
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