Weitz: Below is a recent Seattle Times article exposing one of the larger issues that faces the current Real Estate market - the Mortgage Debt Relief Act. I will provide our thoughts and input where appropriate.
AP — Patrick Boris, a banquet chef
in Las Vegas, is inching closer to his own “fiscal cliff,” 2,100 miles away from
the political brinkmanship under way on Capitol Hill.
If Congress and the White House
allow the country to go over the cliff later this month, Boris figures he could
owe federal income taxes on more than $100,000 in forgiven mortgage debt after
the short sale of his two-bedroom town home next year — a personal financial
“disaster,” in his words.
Weitz - currently, the law is set to expire at the end of this year, BUT there are numerous bills on the floor to take its place.
In Sacramento, Calif., Elizabeth
Weintraub, a real-estate broker who specializes in short sales, says “many” of
her clients have potentially taxable exposures on $200,000 or more in negative
equity balances on their short sales next year if Congress fails to act.
Across the country, fears such as
these are mounting. With the outcome of negotiations over taxes, spending and
the federal debt uncertain, huge numbers of underwater owners worry that a
single legislative provision that has been sucked into the “fiscal cliff”
vortex could devastate them personally.
The issue is the extension of the
Mortgage Forgiveness Debt Relief Act, which is to expire Dec. 31.
Dating to 2007, the law temporarily
amended the federal tax code to allow mortgage debt on a principal home that is
canceled by a lender through a loan modification, short sale or foreclosure to
escape taxation as ordinary income.
Weitz - it applies to loans that were taken out to 'purchase or improve' your PRIMARY residence....it does not apply to loans for rental properties, investment, etc.
Several bills have been introduced
in the House to extend the law for at least another year, and the Senate
Finance Committee passed a bipartisan bill this summer that would do the same.
Weitz - it should be noted that foreclosure or bankruptcy could potentially be used to avoid this tax in Washington State, so it would behove Congress to pass the law as firms like ours would simply push more people into Bankruptcy or Foreclosure to evade this tax burden.
But mortgage-debt forgiveness is on
hold in both chambers, effectively a hostage until Congress works out a grand
bargain, if it ever does.
Though it’s a relatively small and
noncontroversial item compared with the multitrillion-dollar debates over taxes
and spending, what’s striking is that it potentially affects such a large group
of owners and could be extremely painful.
Consider this:
• Nationwide, according to
mortgage-industry estimates, about 11 million owners are underwater.
Weitz - this is unrelated to the tax issue, but provides reason that any optimism in real estate should be cautious optimism as there are certainly some fundamental issues that could derail our current recovery.
New data generated for this column
by realty-information company Zillow indicates that the average negative-equity
amounts of owners who are underwater — their loan balances exceed the property
value — are higher than $90,000 in more than 64 local markets and more than
$50,000 in 470.
• Federally regulated Fannie Mae and
Freddie Mac own approximately 4 million mortgages that are underwater, and as
of Nov. 1 began encouraging owners who are current on their payments but facing
a financial hardship to apply for short sales that forgive their outstanding
loan balances.
All participants in these short
sales who close after Jan. 1 could be subject to federal taxation on the
forgiven balances if Congress does not extend the law.
• Forty-one state attorneys general
recently appealed to Congress to pass an extension so as not to disrupt the $25
billion nationwide “robosigning” settlement they negotiated with five major
lenders.
Among other provisions, the
settlement encourages lenders to forgive billions of dollars in mortgage debt
next year and beyond.
Failure to renew the law, said
Nevada Attorney General Catherine Cortez Masto, would cause families who are
already facing financial distress to be “stuck with an unexpected tax bill”
that could deter them from “participating in this historic settlement.”
What’s the outlook? There are no
indications that either House Speaker John Boehner, R-Ohio, or Senate Majority Leader
Harry Reid, D-Nev., plans a separate vote on a mortgage debt-forgiveness
extension, essentially freeing it from the game of political chicken under way.
Whether or not a grand bargain
including an extension can be struck before the New Year witching hour is
anyone’s guess — and an underwater short seller’s ongoing nightmare.
Weitz: this is certainly a very large issue for many folks in the distressed real estate market, and a constant conversation with our clients. That said, I remain optimistic that Congress will 'come to its senses' and extend the law - only time will tell.
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Weitz Law Firm, PLLC
520 Kirkland Way, Ste 103
Kirkland, WA 98033
