Homeowners Rush to Short Sales Before Tax Break Expires

During the third quarter of this year, short sales soared as underwater U.S. homeowners tried to get out before a helpful tax break expires before the end of the month.

During July, August and September of 2012, according to housing data company RealtyTrac, short sales – those where the home is sold for less than the remaining balance on the mortgage – rose 22 percent from the year before among homeowners who were behind on their payments, while short sales among those current on their loans increased 17 percent.

In a short sale, the bank agrees to forgive the remaining mortgage balance and the homeowner can then get out from under a home that was worth less than they owed. Banks often prefer short sales over foreclosures because although they still lose money, it is not as big a loss. Short sale homes right now sell for an average of $191,025 where foreclosed homes sold by banks sell for $161,954.

In addition to getting higher prices for the homes, in short sales banks also avoid the hassle and legal fees of foreclosure and maintaining the property.

The current law under the Mortgage Debt Forgiveness Act exempts homeowners from having to pay taxes on any debt forgiven in a short sales and with the average forgiven debt of $95,000, according to Daren Blomquist, vice president of RealtyTrac, that is a huge incentive to make these short sales happen.

The act is set to expire on December 31 and unless Congress changes that, some homeowners might soon have to pay as much as $33,250 on short sale debt forgiveness.

“If that law expires, homeowners who agree to short sales could see their income tax jump significantly because the portion of the unpaid loan balance not covered by the short sale proceeds will be considered taxable income in many cases,” Blomquist said in a CNN Money article. “Both lenders and at-risk homeowners are realizing that short sales are often a better alternative than foreclosure.”

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