Fiscal Cliff Weighs Heavily on Short Sale Transactions

As 2012 comes to a close, the status of the resolution of the Fiscal Cliff has Realtors biting their nails as their transactions are in jeopardy and homeowners worried that they stand to lose thousands of dollars in taxes.  Regardless of the outcome, no one is an absolute winner.

First let’s explain the Fiscal Cliff and the possible outcomes. The Fiscal Cliff is a term used to define the end of the Budget Control Act of 2011. These budget cuts and tax credits are scheduled to expire at Midnight of December 31, 2012.

US Lawmakers have 3 potential options to avoid the “Fiscal Cliff”:

  1. They can extend the budget cuts and tax credits another year. The ramifications of this means that the US Debt will continue to grow.
  2. They can let the budget cuts and tax credits expire as planned. The result of this would be tax increases, spending cuts and a possible recession.
  3. The third option would be to meet somewhere in the middle and strive for a moderate economic growth.

So what does all of this mean to the Real Estate market? Set to expire on December 31st is the Mortgage Forgiveness Debt Relief Act. In short, this act eliminates the taxes on a home that is sold for less than what is owed to the bank. When a home is sold for less than the unpaid mortgage balance in a short sale transaction, the difference is considered “earned income” and under typical circumstances the homeowner would be taxed on that difference. But the Mortgage Forgiveness Debt Relief Act allowed for that tax to be forgiven if the sale was for the homeowner’s primary residence. If this act is eliminated, it wouldn’t be uncommon for a homeowner to face a $30,000 tax bill.

As we begin 2013, we must all pay close attention to new laws that come down from US Congress because they will affect all of us and play a very important role in the future of the real estate market.