SARASOTA - People who plan to do a short sale on their home might soon face a much bigger tax bill, thanks to a law set to expire at the end of the year unless Congress acts.
In a short sale, the borrower's bank forgives part of the mortgage. Ordinarily the IRS considers that money that the borrower does not have to pay back to be taxable income. The Mortgage Debt Forgiveness Act passed in 2007 changed that.
But only until the end of this year.
As Congress argues about how to keep the economy from going over the so-called "fiscal cliff," does it notice the housing market heading to what you could call the "foreclosure cliff"? Real estate professionals credit short sales for playing a key role in the housing recovery so far. “About 50% of our sales are short sales and foreclosures, so they've been a very important factor in it,” says Sarasota realtor Lynn Robbins. The Mortgage Debt Forgiveness Act, she says, “has been tremendously helpful. It's saved some people hundreds of thousands of dollars.”
If the money banks forgive borrowers in short sales becomes taxable income, it could slow that recovery. “The inventory could not be re-sold and would clog” the system, says real estate attorney Anne Weintraub. Clients have come in to her office in a mad rush trying to close their short sales before the end of the year, and that they cannot all make it. “On average banks get 40,000 short sale applications a week,” Weintraub says. “It would be impossible to guarantee everybody's going to close” by then.
It makes good public policy sense to extend the debt forgiveness act for at least three more years, she believes, otherwise it will extend the housing crisis. Robbins says that if the law expires, it won't stop short sales, because most people who do them, don't have a choice.
“What is one to do?” she asks. “They don't have the money,” leaving homeowners underwater on their mortgages with the potential choice of either letting the home go into into foreclosure and have that debt follow them for 20 years, or short sell, and have the IRS hand them a giant tax bill.
U.S. Rep. Vern Buchanan, R-Longboat Key, has signed on as a co-sponsor of a bill in the House that would extend the The Mortgage Debt Forgiveness Act for one year, through December 31, 2013.