Short Sales have increased dramatically in the past couple of years as lenders have realized that this tool is a much better solution than foreclosure. Just in the first eight months of 2012, lenders have granted $10.6 BILLION in debt relief, which is mostly in the form of short sales. From January through June of 2012, more than 250,000 short sales were completed. This is a GOOD thing!
Why would this effective method disappear? If Congress does not extend the “Mortgage Forgiveness Debt Relief Act and Debt Cancellation” by the end of the year, homeowners who “short sell” their homes could be hit with large tax bills from the IRS.
Why? A Short Sale is debt-forgiveness. Debt forgiveness is taxable, but Congress passed this “Relief” bill in 2007 so home sellers would not be penalized by being taxed on the “phantom income” of their forgiven loan amounts. But if this Act is not extended, the consequences for a home seller could be severe.
For example, if a homeowner’s mortgage amount is $250,000 and he or she does a short sale for $200,000, the seller would have to pay “ordinary income” taxes on the $50,000 difference, even though no money was received.
I am in favor of Congress extending this benefit to help sellers in need of “resetting” their mortgage debt, and I hope that our Presidential or Vice-Presidential candidates might address this in the upcoming debates. It is frustrating that I cannot find any position statements from either candidate regarding this…