The hotly debated issues of "Fiscal Cliff" and the worries that surround the issue have now inched up a notch higher. The lapsing unemployment benefits and tax increases have already been the center of all concerns. However, the improving real estate scenario could take a hit if one of the major benefits - The Mortgage Forgiveness Debt Relief Act- expires.
The Mortgage Forgiveness Debt Relief Act was a tax exemption scheme that was first initiated in 2007. The Act grants let offs to troubled home owners from paying government taxes on forgiven mortgage principal sums.
However, the act is set to expire by January and will force all the home investors to pay taxes on the forgiven amounts from their short sale mortgages, reports Forbes.
"There are so many people who are now selling short who wouldn't do it if they had to pay tax on the money that the bank is going to forgive them. This is what changed the housing economy," Glenn Kelman, CEO of Redfin, an online brokerage firm told Forbes. "It's the most significant change and hopefully [Congress] will take care of it, but if they don't, we will be in a pickle"
Short sales have experienced an increase this year due to the $25 billion mortgage relief act that was introduced in February. The rate of short sales had shot up 22 percent from the previous year, reports Forbes.
The short sale bout is one of the major reasons for the stabilizing home building market in the country.
If the mortgage act expires, short sales would decline and more number of distressed homeowners would be forced to pay extra taxes, and would lead prospective property investors away from the segment.
"The prospect of being taxed on potentially tens or hundreds of thousands of dollars in additional income may motivate more distressed homeowners to forgo a short sale and allow the home to be foreclosed," Daren Blomquist, vice president of RealtyTrac told Forbes. "Additionally, if the mortgage interest deduction is eliminated due to the fiscal cliff quagmire, it would give many underwater and otherwise distressed homeowners one less reason to hang on to their homes."
"In a world where we're talking about tax reform, this is just a great example of unnecessary complexity that helps no one and hurts everyone," Julia Gordon, director of housing finance and policy at the Center for American Progress told Bloomberg.
