The “fiscal cliff bill” passed by Congress January 1 included a provision to exclude borrowers from paying taxes on debt forgiven through a short sale, foreclosure, or loan modification.
Known as Mortgage Debt Relief Act of 2007, the act was scheduled to expire December 31, 2012, but received an extension for another year.
This can be viewed as both a positive and a negative depending on how you would like to spin it. I believe it is a nice hand out from the government that will allow distressed homeowners that are still stuck in various underwater properties a way out. Doing nothing about an underwater property and hoping that the market will come back and save you is not the answer. In my opinion, the best path to a permanent solution is a Short Sale with debt mitigation provided by legal counsel. This allows you to get rid of the property and remove any and all personal liability related to the mortgage debt and associated costs. This is my opinion of the positive view as it relates to the individual tax payer staying productive versus ending up as a future bankruptcy candidate.
The negative side of the equation really relates to the macro picture for the economy. If Congress did not extend the debt relief then there would be a significant deterrent for people to make a decision thereby preventing more underwater or distressed properties from coming on the market. This would theoretically support a healthier real estate market but the underlying problem of approximately 30% of home owners with mortgages being underwater would still remain.
It may come down to a coin toss. The debt relief does provide a nice opportunity for homeowners to get out of a bad investment and put the property into stronger hands. In the end, it is a very healthy step to a badly needed de-leveraging process. If you have a property that is underwater you should take note and use this one year opportunity to get your fiscal house in order.
Many loan modifications do not meet the needs of the homeowner and after a lengthy process ultimately fail and end up as a short sale or a foreclosure. I would recommend avoiding foreclosure at all costs, especially in deficiency states. This leads you to the short sale as the most constructive option. Short sales do take time with proper debt mitigation. If you settle for a quick short sale and the debt is not mitigated property you may be sorry later. The deal must be negotiated properly before closing to provide you a permanent solution.
Anyone interested in investigating this option can contact me through www.jeffersonmortgage.com or The Negotiated Solution where I have a partnership to provide this comprehensive service with a law firm, a title company, and a real estate brokerage network.
Blogging from the front line.
Lawrence E. Tucker of Tucker & Associates PLLC, principal attorney contributed to this blog.