Sunday, December 30, 2012

Our Loss: Short Sales and Mortgage Interest...

It seems to me that the public is not appropriately upset about the looming Fiscal Cliff.  Even if Congress can come to some last-minute resolution-- you can be sure that there will be areas they will overlook, and programs they don’t extend by mistake or on purpose.  Witness the impending impact on short sales, even our local Board of Realtors sent out a message on this topic--so in a nutshell, here’s the conversation topic of the week: 

Starting Tuesday there is no longer a benefit to a short sale. No matter what the final outcome may be regarding the fiscal cliff, no deal has been struck that will extend the Mortgage Forgiveness Debt Relief Act of 2007 (MFDRA).  This legislation provided tax forgiveness for short sales (that were the borrowers primary residence as well as additional requirements such as time they owned the property).

The whole reason for a short sale was that people who were “underwater” in their homes, with the approval of their bank, could sell the property for less than they owe, and the bank would forgive the debt AND because of the MFDRA the IRS would forgive the debt as well.  With the expiration of this Act, the amount a bank forgives would become taxable to the seller.  So be awarew starting Jan 1st, all short sales will have additional tax consequences until and unless Congress passes some kind of extension

The Administration is trying to find new streams of income—so they can keep spending at the new higher rate--and is reconsidering many of the things Americans have traditionally considered sacred.  Everything is on the table.

And so what about the mortgage interest tax credit?  We are all afraid of the loss of this credit, though not everyone seems to fully grasp what losing this credit might mean beyond what it might cost them personally.
The ability to deduct the mortgage interest paid to a lender for the use of their money has become a fundamental economic benefit to homeownership for tens of millions of Americans.  And just to be fair about it, the Banks have to classify these interest payments as income, and they pay tax on it too. Wouldn’t this be a double tax?

Will the loss of the mortgage interest tax deduction actually affect the health of the housing market? That really depends on how deeply the government decides to cut. If the tax credit is eliminated entirely, the impact on the real estate market could be devastating. Right now, the “move up” market is weak, and people who benefit from the tax credit comprise a good portion of that market.

Eliminating the financial benefits of the tax credit, combined with other tax hikes likely to be imposed on “wealthy” families could drive some potential homebuyers out of the market completely. To be sure, not all homeowners even take the credit, (to get it you have to itemize your return) but without the credit, home prices may well fall, or at least not increase, which will have an effect on pricing throughout the housing ecosystem, depressing prices just when our market is finally beginning to recover from a multi-year downward cycle.

At very least it seems likely the Administration will demand limits on what can be deducted, as well as more stringent regulations on what properties and loans a borrower can claim interest credit against. If these changes are significant, no doubt we’ll experience some softening in the market, likely reversing the growth in economy as a whole. After all, a weakened housing market will contribute to adverse conditions in related markets such as construction, building materials, home appliances and the like.

So even if Monday’s emergency convening of Congress is successful and we don’t go fall over the fiscal cliff, the devil is in the details.  Eliminating some of the benefits of home ownership burdens the middle class in a way that can only hurt the real estate market. Considering that it’s been the housing market that’s pulled the U.S. out of virtually every recession since World War II, it seems like we should be shifting our focus to stimulating it in any way we can rather than doing anything that might knock it down.

Dane Hahn is a real estate professional practicing in  the tri-county area. (Charlotte, Sarasota and Manatee.) . You can reach him at 941-681-0312, or at See him on the web at

Note: Starting Tuesday, anyone considering a short sale should speak to an appropriate professional regarding all tax implications of a short sale.

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