Back in September I warned about the impending doom awaiting unsuspecting short sellers if they didn't complete their short sales by the end of the year because the Mortgage Forgiveness Debt Relief Act is set to expire at the end of the year along with many other tax preferences. It's all part of the fiscal cliff problem.
Without this legislation people who are losing their homes as well as their down payments would be subject to income tax on the amount of debt that they are able to walk away from. Although logical in principal this would just add insult to injury for people already on the ropes. (Note that the debt relief act only applies to debt forgiveness on a principal residence. If it's an investment property then you still have to pay the taxes.)
So there should be no surprise, as we sit here in the last month of the year, that a lot of short sellers are sweating whether or not they are going to be able to close in the next 26 days. I know of several cases where this fear is a major driver in the decision process for the sellers.
And it's not just short sellers affected by this. Anyone standing to benefit from principal reductions, which are being encouraged by the government and funded by that $25 B loan servicing settlement, would also lose if this law expires. So, if there is anything that I don't think should fall off the fiscal cliff this is it. Apparently somewhere between 42 and 49 attorney generals (it all depends what article you read) agree with me as they petitioned congress to extend the Mortgage Forgiveness Debt Relief Act a couple of weeks ago. And, back in August, an extension of this act was included in the Family and Business Tax Cut Certainty Act of 2012 and approved by the Senate Finance Committee. The only problem with that act is that it includes 50 other tax-cutting provisions, which sounds like a political nightmare.
However, I haven't heard of anyone opposed to the extension of this act and frankly they can extend it at any time during 2013 and make it retroactive to the beginning of the year. Also, the all-powerful realtor lobby is hard at work on this one - one of the few times I actually agree with their agenda. So, although I can't guarantee that all is clear, I think it's a relatively safe bet that this legislation will get extended.