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.