Galloway and Collens, PLLC

Can you avoid falling over the fiscal cliff with a short sale?

If there is one thing that has the entire nation on edge it's the uncertainty of the fiscal cliff. With the federal budget still in limbo, homeowners who are still paying on mortgages they may not be able to afford fear that soon, the coming of the New Year could mean an increase in their taxable income.

With this in mind, many real estate agents are now pushing for more homeowners to consider short sales as an option instead of the possibility that the unpaid portion of a mortgage may be considered taxable income come 2013.

Although short sales may look attractive-offering homeowners the chance to sell their property for less than it's worth, in exchange for an out from their mortgage-there are still a few drawbacks that might have some property owners hesitant to sell just yet.

The first thing to note is that you must first get your bank to agree to a short sale. Because the bank will be "eating" the remainder of your mortgage, thereby taking a hit financially, many banks will not agree to a short sale until you're already in foreclosure. Even though banks usually jump at the opportunity to unload properties-otherwise they must pay property taxes and endure the hassle of selling the property themselves-if the bank thinks that there is a chance that you'll pay back the mortgage, they will not agree to a short sale.

So what happens if you decide not to go through with a short sale before the end of 2012? There's so much uncertainty surrounding the looming fiscal cliff that real estate experts are divided on the issue. If Congress rejects the extension of the federal Mortgage Debt Forgiveness Act, the IRA will begin treating all unpaid mortgage debt as taxable income for a majority of borrowers. If this happens, chances are we could see another round of unwelcomed foreclosures just on the horizon.

Source: CNNMoney, "Short Sales Jump Ahead of Tax Hike," Les Christie, Dec. 11, 2012

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