George Santayana is credited with the saying that those who forget the past may be condemned to repeat it. We live in a world where federal tax benefits seem to be viewed as fixtures to which we have entitlement, but many of these benefits are subject to sunset provisions.
This is the case with “short sales” of real estate. A short sale is a sale of real estate for a price that is less than the current mortgage indebtedness. In not so olden times a house that had more debt than value couldn’t be sold except at foreclosure. But because foreclosure proceedings are so slow, lenders began to adopt a policy of taking a deed in lieu of foreclosure and permitting the borrower to escape payment of the deficiency. This allowed the lender to take the title to the property and quickly sell it in a private setting rather than see the house knocked down to the highest bidder the sheriff could find in a once a month auction.
Until 2007, one did not escape so easily. If you turned your house over to the bank for $300,000 when the mortgage debt was $450,000 and the bank did not take a judgment for the deficiency, the discharge of the indebtedness was considered income to the borrower. It meant that if he went the short sale route on the numbers just referenced, he had $150,000 of phantom income and that income was subject to tax at ordinary rates.
In 2007 the government passed the Mortgage Forgiveness Debt Relief Act. It eliminated this tax on unpaid income but only through December 31, 2012. The tax bill passed in January, 2013 revived the law but only through the end of 2013.
Could the law be extended again? Yes. Will it? Perhaps. But that’s no guaranty. If you are to have any hope of effecting a short sale before December 31, 2013, now is the time to start down that road at double step. You typically need an appraisal of your home from which the borrower can judge the extent of its probable loss. In the end, you need all secure mortgage holders to agree to permit you to sell the property for less than the mortgage debt outstanding. The first step is typically to contact a realtor and ask who manages their portfolio of properties that will be made available for short sale.