One of the casualties of the fiscal cliff could be the Mortgage Debt Forgiveness Act, and sellers are rushing to get their short sales completed before December 31, 2012 in order to avoid being taxed on any unpaid mortgage debt that they “escape” via a short sale. Short sales have been on the rise since July, with borrowers behind on their payments posting a 22 percent increase in short sales year-over-year and borrowers current on their payments posting a 17 percent increase.
Real estate agents are encouraging their short sale sellers to get their deals done before the end of the year in case the fiscal cliff claims the life of the legislation that forgives unpaid mortgage debt once the home goes through a short sale. If that act expires, the IRS could view any and all forgiven mortgage debt as taxable income, creating a nightmare for homeowners with nothing left in their bank accounts when the IRS shows up with a bill for an alleged “windfall.”
In a short sale, the mortgage lender agrees to take less money for a home than the borrower owes and may forgive the excess debt in exchange for getting the property off the books. However, if you do a short sale and the bank forgives $50,000 on your mortgage, the IRS can view that $50,000 as money received by you that should be taxed. Given that the average amount of forgiven debt in a short sale is about $95,000, if the IRS begins taxing that money many homeowners could end up in worse shape than they were when they were facing foreclosure.
Most people agree that the Mortgage Debt Relief Act should be extended into 2013, but no one knows if the legislation will withstand negotiations over the fiscal cliff. Do you think that this is a serious threat to short sales?