Effect Of The Fiscal Cliff On Short Sales And What Buyers Need To Do Now!
I wish I had thought of this challenge to short sales. I did not. I'm just not that financially farsighted. I heard about it on a report this morning on MSNBC.
The report talked about the relationship between the looming fiscal cliff and the effect such an event might have on real estate short sales.
Here's the thing. When a property is sold as a short sale, it actually sells for an amount of money that is less than the amount of the outstanding mortgage. Let's say, for example, that your mortgage is $300,000. Due to current market conditions, you can only sell the house for $200,000. So, you have a shortfall of $100,000 against the mortgage. Your mortgage company agrees to permit you to sell the house for less than the full mortgage amount and you transfer ownership of the property to the new owner for $200,000 and the mortgage company "eats" the remaining $100,000 that you owe. That's a short sale in it's most basic form.
But here's the dilema. That shortfall amount is considered to be taxable income on the seller's federal income tax bill. In the example above, the seller would be responsible for paying the income taxes on an additional $100,000 of annual income. That is a load of tax money for someone who may already be in financial trouble, which is probably the reason the house is being sold at a loss.
For the last few years, the government has been "forgiving" this shortfall income. That is one of the reasons why so many sellers are able to sell short -- there is no tax penalty to pay.
But, now comes the fiscal cliff. Under the new tax rules (more correctly, the "old" tax rules) which may begin on January 1, 2013, the difference in what is owed will likely no longer be forgiven and instead will likely be taxed as ordinary income.
So, now we have people who are forced into a short sale suffering the financial loss of equity from the sale of the property, PLUS a greatly increased personal tax liability due to the shortfall being taxed as ordinary income.
What is a seller to do?
Well, the great fear among financial experts is that many sellers will simply opt out of the short sale contract and allow the property to go into foreclosure. This means sellers would cancel existing contracts for sale, and also cancel existing listing agreements with real estate brokers if the sale involves a short sale. Real estate agents stand to lose in both instances, and mortgage companies stand to lose in the former instance.
If the seller elects to go into foreclosure rather than complete the short sale after January 1, 2013, the buyer is pretty much out-of-luck. It is pretty darn hard to drag somebody kicking and screaming into the closing room and have them sign away their property at a loss.
So, if you are a buyer of a short sale today, and it seems like you have been under contract for weeks and weeks, and the mortgagee is just dragging things out for no good reason, and the closing agent keeps "losing" your papers, and your real estate agent keeps shrugging his shoulders every time you ask how the sale is going ... well ... it is time for you to get aggressive with everybody involved -- including the seller's mortgage company -- and insist that they get the deal closed on or before December 31, 2012. If those people won't listen to you, then ask the seller to start calling his real estate and mortgage advisers with the same demand. Don't stop at one call, call them every cotton-picking day until the deal is closed. Yes, be a pest.
If you don't start doing this, come January 1 you just might not have a deal to close at all.
The report talked about the relationship between the looming fiscal cliff and the effect such an event might have on real estate short sales.
Here's the thing. When a property is sold as a short sale, it actually sells for an amount of money that is less than the amount of the outstanding mortgage. Let's say, for example, that your mortgage is $300,000. Due to current market conditions, you can only sell the house for $200,000. So, you have a shortfall of $100,000 against the mortgage. Your mortgage company agrees to permit you to sell the house for less than the full mortgage amount and you transfer ownership of the property to the new owner for $200,000 and the mortgage company "eats" the remaining $100,000 that you owe. That's a short sale in it's most basic form.
But here's the dilema. That shortfall amount is considered to be taxable income on the seller's federal income tax bill. In the example above, the seller would be responsible for paying the income taxes on an additional $100,000 of annual income. That is a load of tax money for someone who may already be in financial trouble, which is probably the reason the house is being sold at a loss.
For the last few years, the government has been "forgiving" this shortfall income. That is one of the reasons why so many sellers are able to sell short -- there is no tax penalty to pay.
But, now comes the fiscal cliff. Under the new tax rules (more correctly, the "old" tax rules) which may begin on January 1, 2013, the difference in what is owed will likely no longer be forgiven and instead will likely be taxed as ordinary income.
So, now we have people who are forced into a short sale suffering the financial loss of equity from the sale of the property, PLUS a greatly increased personal tax liability due to the shortfall being taxed as ordinary income.
What is a seller to do?
Well, the great fear among financial experts is that many sellers will simply opt out of the short sale contract and allow the property to go into foreclosure. This means sellers would cancel existing contracts for sale, and also cancel existing listing agreements with real estate brokers if the sale involves a short sale. Real estate agents stand to lose in both instances, and mortgage companies stand to lose in the former instance.
If the seller elects to go into foreclosure rather than complete the short sale after January 1, 2013, the buyer is pretty much out-of-luck. It is pretty darn hard to drag somebody kicking and screaming into the closing room and have them sign away their property at a loss.
So, if you are a buyer of a short sale today, and it seems like you have been under contract for weeks and weeks, and the mortgagee is just dragging things out for no good reason, and the closing agent keeps "losing" your papers, and your real estate agent keeps shrugging his shoulders every time you ask how the sale is going ... well ... it is time for you to get aggressive with everybody involved -- including the seller's mortgage company -- and insist that they get the deal closed on or before December 31, 2012. If those people won't listen to you, then ask the seller to start calling his real estate and mortgage advisers with the same demand. Don't stop at one call, call them every cotton-picking day until the deal is closed. Yes, be a pest.
If you don't start doing this, come January 1 you just might not have a deal to close at all.
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posted by Terry Ward at 12:09 PM
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