Ken’s Korner

To Short Sell or Not to Short Sell: What Happens to Real Estate Short Sales if there is No Mortgage Debt Relief?

As of December 31, the Mortgage Debt Relief Act of 2007 is set to expire. Unless Congress acts, all of the remaining debt relief to be provided in 2013 will likely be considered taxable income. A good portion of our business at FLAstay.com involves short sales. Short sales are a very viable option for many underwater homeowners. Many Realtors who do short sales are concerned about the future of short sales. So, Ken, you ask, “Is this the end of short sales?”No.First, let me explain the Mortgage Debt Relief Act: The Act contains a provision that relieves some sellers of federal income tax liability when a lender forgives the difference between the amounts owed on the mortgage vs. that recovered by the lender in the short sale. In short, when a lender waives this deficiency, the debt is forgiven and the lender issues a 1099-C. According to IRS rules, this forgiven debt is considered income and is, therefore, subject to federal tax. Currently, the Act provides protection for owners who short sell a home which qualifies as their primary residence. Thus, there is a fear in the real estate industry that if this provision were to sunset on Dec. 31, 2012, short sales would no longer be a viable option for homeowners.The concern is unwarranted.

Here’s the reality:

1. Many homeowners don’t qualify for protection under the Act now, especially in our Disney-area market where, by definition, primary residences are the exception not the                    rule.

2. There are significant benefits to a short sale with or without the Act. I find, for example, that full deficiency waivers have become relatively commonplace.

3. Lastly, I honestly wonder how much tax sellers actually end up paying with or without the Act.

Reasons to do a Short Sale with or without the Act

If you are an owner of an  investment property or vacation home, you enjoy the potential benefits of   a) getting a deficiency waiver,   b) avoiding foreclosure, and   c) fast-tracking the restoration of your credit to where you could qualify for another mortgage in as little as two years. Let’s face it; a waiver of the deficiency is a much bigger deal than the amount of any tax   consequence. Remember, the deficiency is what you owe the bank whereas the tax liability is what you owe the IRS on the amount of the deficiency. Recently amended       guidelines of Government Servicing Entities or ‘GSE’s,’ including behemoths Fannie Mae and Freddie Mac, provide for a full waiver of the deficiency for most sellers. The ability to complete a short sale with a high degree of certainty of a full release from the debt obligation is the biggest reason I see for short sales to continue as an attractive  option for underwater owners. The advice of a good accountant or tax attorney will continue to be valuable to the short sale owner. When the seller’s lender issues a 1099  upon completion of the short sale, there are options that the seller should ask their tax professional to explore to mitigate the tax liability. If the selling price of the house is   less than the original purchase price, as is most often the case in a short sale, this loss can be used to offset reported income. Alternatively, debts forgiven in a short sale may  qualify under an IRS insolvency exclusion. See IRS Form 982 for details. So, if you are upside-down on your mortgage – whether it is on your primary residence, vacation   home or investment property – your opportunity for relief does not sunset on Dec. 31, 2012. I encourage you to proceed. Contact an experienced real estate short sale professional and qualified tax professional.Read more about the Mortgage Forgiveness Debt Relief Act and Debt Cancellation at:http://www.irs.gov/Individuals/The-Mortgage-Forgiveness-Debt-Relief-Act-and-Debt-Cancellation-http://www.irs.gov/uac/Publication-4681,-Canceled-Debts,-Foreclosures,-Repossessions,-and-Abandonments