For many homeowners who are in the middle of, or contemplating, a short-sale, there are some important pieces of the Fiscal Cliff crisis that has gripped the national media over the past weeks. Having a home that’s worth much less than you owe is sadly not uncommon in almost any part of the US. Over the past several years, some borrowers have gone to the banks who hold their mortgages and asked for the opportunity to sell their property for what the market may provide and be released from the balance of the debt obligation. In many circumstances, the banks have seen this as an advantage over foreclosure, which is costly, drawn out, and fraught with risk and bad press.
When these “short sales” first began happening in larger and larger numbers, borrowers quickly realized they had another problem. The IRS. Forgiven debt is often treated as taxable income, and many of these people left an unmanageable mortgage while walking straight into a huge tax bill. At the end of 2007, Congress passed the Mortgage Forgiveness Debt Relief Act of 2007. This provided many qualifying homeowners with an exemption on the income taxes they would owe from going through foreclosure or negotiating a short sale. This Act expired on Monday.
The problem with the expiration of this exemption is the possibility that it could cause many homeowners to abandon plans for short sales, deed-in-lieu’s, and other processes that were working to help re-stabilize the real estate market in favor of bankruptcy, foreclosures, and other more drastic means of trying to avoid the tax implications.
The good news is, based on what we’ve seen from the latest legislation coming from Capitol Hill, the extension of the Mortgage Forgiveness Debt Relief seems to be part of the package. Check out American Taxpayer Relief Act of 2012, and particularly the bottom of page 25. Good news for all.