Many Americans were chiefly concerned with the tax implications of the “fiscal cliff.” Would my personal income taxes go up or down? Another point of concern was what to do about entitlement programs. What happens to my Medicare or Medicaid?
There was a little something called the Mortgage Debt Forgiveness Act that was set to expire at the end of 2012 absent any government action. This little something is probably ignored or not even known about by many Americans, but those who know about it and whose financial livelihoods are directly affected by it know it all too well. Thousands more who are underwater in their homes may not know about it yet, but will in the near future.
For the readers who did not read our previous blog post, the Mortgage Forgiveness Debt Relief Act exempts forgiven debt from being taxed. If you short sell your home for $200,000 when you owed $300,000, that $100,000 is considered taxable income by the IRS. It has a double whammy affect on distressed property owners who first of all must take a credit hit for the short sale and then later must pay taxes on an amount that they never really had in their pockets. It takes a financially distressed person and hands them a life raft with a bank robber sitting in it.
The number of short sales continued to rise throughout 2012 and outnumbered foreclosures in some parts of the country. Many individuals facing foreclosure took advantage of the provisions of the Mortgage Forgiveness Debt Relief Act and did a short sale. That way they did not suffer as bad a hit to their credit and they were out from under the loan without additional taxes to pay. Real estate agents and real estate attorneys who knew how short sales work urged clients and sellers to take advantage of the act before the end of 2012 because it was set to expire. The term “bank initiated short sale” became a common term among real estate agents and clients. Even lenders see the advantage to a short sale versus foreclosure. This led to a flurry of short sales at the end of the year. Some analysts point to this as another catalyst behind improving real estate numbers in certain parts of the country.
The last minute deal saved this act and in doing so aided many real estate related parties. Property owners thinking about a short sale can continue on that path and not pay taxes on any forgiven debt. This helps lenders as well because they continue to get bad loans off the books through short sales. It is usually financially better for a lender to get rid of a property through the short sale process rather than go through what can sometimes be a lengthy foreclosure process at the end of which they still have to try and sell the property. Had this provision expired, there was a good chance that many distressed homebuyers wanting to do a short sale would simply throw their hands up and say what is the point, we might as well wait for the bank to foreclose. Now all of the sudden the banks would be right back where they were with lots of new foreclosure situations to deal with.
We are certainly not going to go into all of the details of the deal cut by congress to avert the “fiscal cliff”, but extending the provisions found in the Mortgage Forgiveness Debt Relief Act certainly help maintain a little stability in what some consider an improving real estate market.
See Our Related Blog Posts:
Bank of America Pays for Short Sales
Short Sale Snafus