To help those who escaped foreclosure by way of short sale, Washington has decided to retroactively extend a tax relief measure that forgives taxation on the difference between the mortgage and final short sale price.
The bill ended at the end of 2013. If the extension isn’t approved, more than 300,000 families who short-sold a house in 2013 will be subject to tax this time next year.
For many Americans hit hard by the housing crisis and stalwart enough to push through the often complicated process of a short sale, it could be doubly painful to be stung by a potentially five-figure tax penalty.
Short sales have become much more streamlined since the onset of the recession. Nevertheless, the IRS backing off from taxing the economic schism created by short sales shouldn’t be considered all that tall an order. After all, most of the rapid appreciation that led to such high loan-to-value ratios was artificially stimulated.
The extension of this tax benefit isn’t a done deal yet, but it did make it through committee hearings on Capitol Hill.
After all, most of the rapid appreciation that led to such high loan-to-value ratios was artificially stimulated.
The current tax law states the forgiven mortgage amount in a short sale is income. Therefore, it should be subject to taxation. However, reasonable evidence shows that the short sale process itself does enough financial vetting of the mortgage holder to prove that their economic situation will only benefit to the extent that they are no longer paying a mortgage. And, there is no return on investment. The seller walks away breaking even, minus a sound credit rating.
Proponents of the tax benefit extension argue that the added tax fees promote strategic defaults, which occur when a family purposefully walks away from a home with no formal measures in place to settle the mortgage. In short, they deliberately stop paying.
The government has smartly recognized that any sort of additional financial pain beset on the country as a result of the housing market would no go over well two years out from a major election cycle. It could also put another dent in the economy. Who needs that?
Also, Washington’s dire need for political capital is also at play here. Our elected officials need as much goodwill as possible.
Most people and organizations in the know believe that the extension will pass with its retroactive measures intact.