Housing Alert: Short Sales May Be in Big Trouble - IRS would count the cancelled debt as income

As lenders plow through a backlog of over five million delinquent mortgages, short sales are becoming an ever more popular escape route. A short sale is when the bank allows a home to be sold for less than the value of the mortgage. The bank takes the loss, but that loss is generally less than a more costly foreclosure.

Housing Alert: Short Sales May Be in Big Trouble - IRS would count the cancelled debt as income Short-sales-foreclosure-sales-500

Housing Alert: Short Sales May Be in Big Trouble - IRS would count the cancelled debt as income Short-sales-foreclosure-sales-500

The government has been pushing more short sales at Fannie Mae and Freddie Mac through financial incentives, and banks are streamlining the process. Short sales have been gaining so much steam, they actually surpassed sales of foreclosed properties last spring, according to LPS Applied Analytics’ Home Price Index. But all the progress that has been made could end abruptly.

A short sale is debt forgiveness. Debt forgiveness is taxable. In order to help the huge volume of troubled borrowers and promote more short sales, Congress in 2007 passed the “Mortgage Forgiveness Debt Relief Act and Debt Cancellation.” The debt forgiveness from a short sale or a mortgage principal reduction would no longer be taxable. That act is part of many Bush era tax cuts that expire at the end of this year. Without an extension, short sales would grind to a halt, as might mortgage modifications that involve principal reduction.

“Realtors believe if the legislation is not extended, households who are already struggling to pay their mortgages will be further burdened with tens of thousands of dollars in additional taxes that they probably can’t afford to pay because the IRS would count the cancelled debt as income,” said Jamie Gregory, a lobbyist for the National Association of Realtors.

http://www.cnbc.com/id/49214903

Housing Alert: Short Sales May Be in Big Trouble - IRS would count the cancelled debt as income

Housing Alert: Short Sales May Be in Big Trouble - IRS would count the cancelled debt as income

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