As written before on this blog, one of the prime benefits of a person selling his/her home via short-sale, as opposed to letting his/her home be sold via sheriff’s sale, is that more often than not the outstanding balance owed to the primary mortgage holder after the short-sale has taken place would be forgiven.  Of course this has to be negotiated by the attorney or realtor dealing with the short-sale lender, but if agreed to by the short-sale lienholder, it offers substantial relief (both emotional and financial) to the seller/debtor as the (i) debt would not have to be paid back and (ii) seller/lienholder could move on with their lives.  However, the benefit of doing a short-sale has now changed and here is why.

A key benefit of the discharge of any balance forgiven by the primary mortgage holder (and in some instances the home-equity line of credit lien holder) in a short-sale was that the forgiven debt would not be deemed income by the federal government.  As a result, the short-sale seller/debtor would not be taxed by the federal government on the debt forgiven.  This was due primarily to what is known as the Mortgage Forgiveness Debt Relief Act (the “Act”), which was passed in 2007.  However, as of January 1, 2014, the forgoing has now changed.  The reason being is the Act expired on December 31, 2013 and has not been extended through 2014.

While there is a bill currently before the senate seeking to extend the Act, to date, it has not been passed.  Some say the reason is politics.  Whatever the reason is, the failure of the Act being extended will have a significant toll on the short-sale seller/debtor.  The reason being is most short-sale sellers/debtors are in financial distress.  As a result it doesn’t matter if the short-sale seller/debtor has been forgiven debt of $100,000.00 and now only has to pay back $20,000.00 in taxes.  The fact is to most short-sale sellers/debtors both debts are insurmountable.  Unless something changes, most people who would have benefited from a short-sale will no longer seek to do one.  As a result the short-sale borrower/seller’s agony will continue unless the extension of the Act passes the senate or the short-sale seller/borrower seeks an alternate remedy (e.g., bankruptcy relief).

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