Short Sales No More?

Lost in the shuffle of our perpetually-floundering economy and Washington's frustrating inability to come to any kind of agreement, there is a small but very important issue on the table, the extension of the Mortgage Forgiveness Debt Relief Act.

A quick bit of history will explain just how important this is. In 2007 this Act was passed, renewed in 2008 and due to expire at the end of this year. Let's be clear, this has nothing to do with the tax cuts that also are expiring at the end of 2012. This is a sole and separate entity. What this does is not immediately apparent from the title, this Act does not actually forgive mortgage debt in any way. It merely allows an underwater borrower to not pay taxes on income that they never received in the first place. A little confusing but then this is government, right?

Let me give you an example. Mr. Seller owes $150,000 on his prinary residence. His job has been downsized and he must move to another state to obtain work. The current market value of Mr. Seller's home is $100,000. Mr. Seller's realtor explains that in order to sell his home and move on, Mr. Seller must employ what is called a Short Sale- selling the home and paying the bank far less than is owed. The sale is successful at $100,000. Mr. Seller will now receive a 1099 for the remaining $50,000 (phantom income) that he was short when paying off his mortgage, the same 1099 that you would use when claiming taxable income. You might feel that there is no income here, Mr. Seller is never going to see that $50,000, if he had he would have paid off the bank, correct?  Here's where the Mortgage Forgiveness Debt Relief Act comes into play. Mr. Seller, under this Act, is not required to pay income taxes on that $50,000 that was never really income to begin with.

If the Mortgage Forgiveness Debt Relief Act is somehow overlooked, if it does not get renewed by the end of the year, Short Sales will likely come to a screeching halt. Folks who are forced to sell an underwater home are probably not in a position to pay taxes on the "phantom income". Doesn't sound all that serious to you? Consider the current shortage of real estate inventory in many markets and that a large chunk of the current inventory in countless areas is made up of short sales. Consider the minute but undeniable (and still very tenuous) value-up that our real estate market has only recently realized. Consider what will happen to your own home's value and ultimately the entire economy if there is another real estate crash.

All this over a tiny, independent Act that might be slipping through the voluminous cracks in Washington as we speak. Whether you agree or disagree I urge you to express your opinion to your congressman, because this is how it's done!