A law that gives financially strained home-sellers tax relief on forgiven mortgage debt has been extended through 2013 as part of "fiscal cliff" talks.
Mortgage debt that's been forgiven by lenders in short sales or loan workouts is typically taxable, which means money coming out of borrowers' pocketbooks. Help arrived in 2007, when the Mortgage Forgiveness Debt Relief Act came to be, giving people a break from taxable income on loan balances of up to $2 million, or $1 million for a married tax filer who's submitting a separate return.
That law was set to expire at the start of 2013 but was among the individual tax breaks saved in the fiscal-cliff deal. Local real estate professionals kept a close watch on its future because roughly 30 percent of home resales in San Diego County are short sales, deals in which homeowners sell their properties for less than what they owe as long as banks approve.
These types of deals surged in 2012 mainly because of a national mortgage settlement that forces banks to offer consumers housing relief.Roughly two-thirds of the helpoffered to California borrowers in the deal arrived in the form of short sales.
The expiration of the mortgage-debt relief act could have led to serious economic consequences for San Diego County and other parts of the nation, said local housing analyst Alan Nevin. Possible outcomes included a surge in bankruptcies and foreclosures because certain borrowers would have been stuck with a tax bill after a short sale or loan modification.
The law's expiration also could have slashed the county's already lower-than-normal housing inventory, Nevin added. Without the tax benefit, fewer homeowners would have attempted to do short sales, which would mean fewer homes entering an already slimmed-down market.
"If it was not extended, there would've been a number of people who also would have just let their homes go back to the lender," Nevin added.