Short sale tax break set to expire at year's end

In the wake of the housing market collapse, some underwater mortgage borrowers chose to unload their properties through a short sale to avoid foreclosure.

In the wake of the housing market collapse, some underwater mortgage borrowers chose to unload their properties through a short sale to avoid foreclosure. But as a tax deduction for this sales option is set to expire at the end of 2012, some experts say the rate of short sales could surge in the coming months.

Short sales a viable option

This option is less damaging to a homeowners overall financial standing. It allows them to unload their property at a price that is lower than the amount they owe to their lender. In addition, current tax benefits, which started after the housing market collapse in 2007, make this option much more appealing to troubled borrowers.

Prior to the current laws, if a homeowner was 20 percent underwater on their $200,000 mortgage, and sold their home at a $40,000 discount, this difference was taxed by the government. For those in the 25 percent tax bracket, this resulted in $10,000 owed to the Internal Revenue Service at the end of the year.

Many tax professionals want the break to continue

However, under the current laws, the tax on this difference is completely waived. Prior to its implementation, many industry professional viewed this tax as "strange," as it made little sense to hit households in financial distress with hefty bills that could negate their option to enter a short sale in the first place.  

"Everybody [considering a short sale] needs to talk to a CPA and see if now is the time for them to get off the Titanic and in a lifeboat before this law expires," Discover Arizona Real Estate co-owner Marge Peck told MarketWatch. "I've just hired more staff. Were prepared for the tsunami of people saying 'I've waited long enough, nothing's going to change.'"

So far, this tax break has already been renewed once, but some experts fear that this won't happen again at the end of 2012. Without the relief in place, many distressed borrowers may start to unload their properties as the safety and soundness of the tax break will no longer work in their favor. In an effort to maintain this relief, a number of industry groups, including the National Association of Realtors, are lobbying to lawmakers in its favor.



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