Many would call 2012 a turnaround year for housing. Even moreso, 2012 also appeared to be the year of the short sale. In fact, short sales rose 22% in 2012, according to a report released by RealtyTrac.

One of the largest appeals behind the short sale is the Mortgage Debt Forgiveness Act, signed by President Bush, protects homeowners from paying tax on the unpaid portion of their debt. This act was set to expire on Dec. 31 as a part of the fiscal cliff and had everyone in the housing industry holding his or her breath.

Letting the tax relief act expire would inevitably knock the market back onto unstable grounds. If not extended, unpaid mortgage debt would be considered taxable income. RealtyTrac reported that the average amount of forgiven debt in a short sale is, on average, $95,000. The tax on that could hit $33,250 or higher, depending on the outcome of the fiscal cliff.

Back at the beginning of December, RealtyTrac Vice President Daren Blomquist voiced his concern over a potential expiration. “The potential expiration of the Mortgage Forgiveness Debt Relief Act would likely stifle many short sales when homeowners understand that the debt being forgiven through the short sale is taxable as income,” Blomquist said.

However, much to the relief of the mortgage industry and real estate professionals throughout the U.S., Congress threw a ‘hail Mary’ pass on Jan. 1 and extended the deal for another year.

Mortgage Bankers Association CEO David Stevens views the Mortgage Debt Forgiveness Act extension as a definite benefit for the housing market, but mostly because it allows distressed borrowers to avoid tax hits on alternative dispositions.

“That to me was the greatest concern,” Stevens said. “We are dealing with the most severely distressed segment of the housing market and potentially surprising families (who get debt relief) with a tax bill.”

When it comes to the deal’s effect on short sales, he added, “I for one think we need to clear out these problems and allow families to resettle and move on.” The reinstatement of the tax relief ensures borrowers who want to move via a short sale or some other measure can do so without tax liabilities, Stevens suggested.

Extending the tax break will ensure short sales continue to thrive in 2013, ultimately cushioning the housing recovery even further.


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