NOTE L - INCOME TAXES

The components of income tax expense (benefit) for the years ended December 31, 2012, 2011 and 2010 are as follows:

	2012		2011		2010
Current
Federal	$	-		-	$	-
State		-		-		-
Total current		-		-		-

Deferred
Federal		-		473		(375	)
State		-		-		-
Total deferred		-		473		(375	)
Total income tax expense (benefit)	$	-		473	$	(375	)

On November 6, 2009, the Worker, Homeownership, and Business Assistance Act of 2009 was enacted into law and amended Section 172 of the Internal Revenue Code to extend the permitted carryback period for offsetting certain net operating losses (NOLs) against earnings for up to five years. Due to this enacted federal tax legislation, AV Homes carried back its 2009 NOL against earnings it generated in the five previous years. As a result, AV Homes received a federal tax refund of $33,627 during 2010.

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred income tax assets and liabilities as of December 31, 2012 and 2011 are as follows:

	2012		2011
Deferred income tax assets
Tax over book basis of land inventory	$	14,564	$	14,524
Unrecoverable land development costs		6,622		6,965
Executive incentive compensation		1,099		548
Net operating loss carry forward		33,872		19,987
Impairment charges		74,551		56,973
Other		5,428		5,945
Total deferred income tax assets		136,136		104,942
Valuation allowance for deferred tax assets		(126,533)		(91,483	)
Net deferred income tax assets		9,603		13,459
Deferred income tax liability
Book over tax income recognized on sale of the Ocala Property		(9,118)		(12,899	)
Tax over book on 4.50% Convertible Notes		(696)		(767	)
Book over tax basis of depreciable assets		211		207
Restricted stock		-		-
		(9,603)		(13,459	)
Net deferred income tax liability	$	-	$	-

In accordance with ASC 740, AV Homes evaluates its deferred tax assets quarterly to determine if valuation allowances are required. ASC 740 requires that companies assess whether valuation allowances should be established based on the consideration of all available evidence using a "more likely than not" standard. Our cumulative loss position over the evaluation period and the uncertain and volatile market conditions provided significant evidence supporting the need for a valuation allowance. During 2012 and 2011 we recognized an increase of $35,050 and $68,961, respectively, in the valuation allowance. As of December 31, 2012, our deferred tax asset valuation allowance was $126,533. In future periods, the allowance could be reduced based on sufficient evidence indicating that it is more likely than not that a portion of our deferred tax assets will be realized.

In 2006, we sold property we owned in Marion County, Florida to the Board of Trustees of the Internal Improvement Trust Fund of the State of Florida under threat of condemnation. The bulk of the land was transferred in 2006 and the final closing took place in 2007. These transactions and subsequent correspondence with the Internal Revenue Service entitled us to defer payment of income taxes of $24,355 from the gain on these sales until replacement property is sold provided we obtained qualifying replacement property for the Marion County property by December 31, 2010. We believe that we acquired appropriate replacement properties by December 31, 2010. If the Internal Revenue Service determines in the future that some or all of the properties acquired by us as replacement properties do not qualify as replacement properties, we may be required to make an income tax payment plus interest on the value of the portion of the properties determined not to qualify as replacement property.

No additional income tax benefits were generated from the exercise of share-based compensation during 2012, 2011 and 2010.

A reconciliation of income tax expense (benefit) to the expected income tax expense (benefit) at the federal statutory rate of 35% for each of the years ended December 31, 2012, 2011 and 2010 is as follows:

	2012		2011			2010
Income tax (benefit) expense computed at statutory rate	$	(31,582)		(57,893	)	$	(12,419	)
State income tax (benefit) expense, net of federal benefit		(3,388)		(6,521	)		(1,200	)
Adjustment to 2009 net operating loss carryback		-		-			795
Change in valuation allowance on deferred tax assets		35,050		68,961			12,103
Prior period adjustments charged to retained earnings		-		(4,044	)		-
Other		(80)		(30	)		346
Income tax (benefit) expense	$	-		473		$	(375	)

During 2010 and 2009, we received income tax payment refunds of approximately $33,627 and $21,356, respectively, related to taxable losses generated during 2009 and 2008, respectively. We did not receive income tax payment refunds in 2011 or 2012.

On February 10, 2012, AV Homes agreed with the Internal Revenue Service's Notice of Proposed Adjustment to the 2009 net operating loss carryback. This adjustment generated an income tax expense of $473 for 2011 with a reduction in the anticipated income tax receivable in the same amount. The anticipated income tax receivable as of December 31, 2012 is $1,293.