The Mortgage Debt Relief Act is due to expire at Midnight, December 31, 2012. This means that distressed homeowners who are trying to complete a short sale or foreclosure will be liable for taxes on the amount of their loans which is forgiven – IF their transaction does not close by December 31st.
There has been a lot of speculation throughout 2012 about whether this law would be extended. It appeared in August that a deal might be in the works, as the senate had approved their version of a plan to extend debt forgiveness. But as far as I can tell the election has derailed this effort and I’ve seen no mention of any concrete plans to reach an agreement on an extension.
There is much talk about avoiding the fiscal cliff, but since housing news is, (erroneously), reporting that a “housing recovery” is underway, there is even less impetus on the congress to worry about this particular piece of legislation. And it seems that the government is much more efficient at removing tax breaks than they are at adding them.
In the present climate there are plenty of bigger “fish” to focus on, given the fact that we only have 7 weeks left in 2012. With the holiday season rapidly approaching, there is very little time for congress to move decisively on this particular issue. As a result, I think it’s becoming highly likely that the Mortgage Debt Relief Act will expire at years end, as scheduled.
Because foreclosure proceedings and short sales can be lengthy, drawn-out, agonizing affairs anyway, there are undoubtedly many thousands of distressed home owners who are desperately trying to complete a short sale or hoping to conclude a foreclosure before new years eve rolls around. If they don’t, they are risking a fat tax bill from Uncle Sam for the taxes owed on the debt that has been forgiven. The heat is on to get a deal done before years end.
For real estate investors this represents an unusual and brief window of time in which those who wish to sell a home quickly will be more highly motivated than ever. It’s going to be an unusual two months for those investors who focus on buying single family homes through creative means such as short sales.
And short sale investors take note – it also may mean your-days-are-numbered, at least in the short term. While I’d expect to see a huge uptick in short sales between now and the end of the year, they may also drop off to virtually zero for a month or two afterward, maybe longer, as sellers try to determine whether or not they can afford to sell and pay a hefty tax bill.
Real estate agents should be mindful that any active short sales have to be completed now, not later. This means you may need to be more flexible than usual and help your sellers get a deal done even if this means taking a commission cut, (the banks will hit you up anyway), and get the home sold to an investor who can pay cash and close quickly. We’re out of time for those 6 month affairs where you don’t hear from the bank for two months at a time. Something has gotta happen now. Don’t leave your clients owing a big tax bill just because you aren’t used to working with investors. It’s time to “give up the ghost” as we like to say in the south.
If you are a distressed seller, and your home is in danger of foreclosure, but you are not currently under contract to sell, and you have no offers on the table, it may be time to plan your exit strategy. Should you walk away before year’s end? Perhaps. It depends on your specific situation, and whether you would actually owe taxes if the MDR Act should expire with you still in a distressed situation. It’s a tough call, but the only thing worse than a foreclosure or short sale is owing taxes on a foreclosure or short sale. That will just add insult to injury.
So, unless congress suddenly puts all this to rest, I think this situation will force more distressed sellers to become highly motivated to sell to anyone at any price or terms that will get them out from under a looming tax bill. We’ll see more abandoned homes in the short term, more creative investment activity, then, on new years, it may all come to a grinding halt while all sides figure out what they’ll do next. In the meantime, it could be a very unusual and unique opportunity for real estate investors who specialize in single family homes.
Donna S. Robinson is a real estate investor, author and residential market analyst located in Atlanta, GA. Follow her on twitter at donnaconsults. Her latest book, Basics Of Real Estate Investing is now available on Amazon.