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Are Short Sales on Their Last Legs?

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One of the easiest and cheapest ways to buy a home may soon be coming to an end.

After the housing market collapse in 2008, lenders were left with a huge problem -- an excess of homes where the borrowers could no longer afford their mortgages.

So, many mortgage lending corporations made the decision to allow the homeowners to sell the property for less than the value of the mortgage, instead of going through a foreclosure.  Called a "short sale", many buyers jumped at the opportunity to purchase a home for a discounted price.

Why the boom?

The federal government has been pushing lenders towards short sales more than foreclosures in recent years, and apparently, they've been cooperative.

Recent statistics from research firm RealtyTrac show that more than a quarter of a million short sales were completed in the first six months of 2012.  In fact, the number of short sales actually surpassed sales of foreclosed properties in the spring of 2012.

So, why on earth would the short sale trend end now?

One of the many incentives to selling a home through a short sale was that you got a tax break -- thanks to an act passed by Congress during the Bush Administration in 2007.

Because short sales are classified as debt forgiveness, normally homeowners would have to pay taxes on the money they received in one (in fact, the IRS is supposed to count the amount of debt your lender forgives as "income").  Under the Bush tax cuts, though, short sales were given an exemption.

The only problem now is that those Bush-era tax cuts expire at the end of the year.

Without an extension from Congress, short sales might stop abruptly.

Why?

Without the extension, the IRS would count the cancelled debt from the short sale as income, meaning it becomes taxable.  People who do short sales would have to pay taxes on the money forgiven as if they had earned it in a paycheck.  Lobbyists for the National Association of Realtors claim many families -- who are already strapped for cash, and are struggling to pay their existing mortgage -- simply cannot afford to pay the additional taxes.


What are the odds of an extension?

The fate of short sales now rests in Washington.  The Senate Finance Committee passed several tax extenders right before the last Congressional recess, but it's unknown if it will make it through the House of Representatives.

Add to that the uncertainty of the looming fiscal cliff and upcoming elections next month, and it's anyone's guess if the short sales tax cuts will be extended or not.

If the Bush tax cuts do expire, there is legislation already in place that will provide some mortgage debt relief to consumers -- including short sales.

This past February, the Attorney General announced that the federal government and 49 states general had joined forces in a state-federal National Mortgage Settlement with the country's five largest mortgage loan companies: Ally/GMAC, Bank of America, Citi, JPMorgan Chase, and Wells Fargo.

In the settlement, the lenders agreed to grant $10.6 billion in consumer relief, including short sales.

But it's uncertain how that relief would be dispersed if the short sales tax cuts were not extended.

So at this point, it's a wait-and-see game for lenders, borrowers, and would-be buyers in the short sale market.
 

 


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