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November 1st, 2012

We need to forgive unpaid tax bills

by Peter Miller


“In normal times, most of us would never consider forgiving unpaid tax bills, but these are not normal times.”
-Dave Liniger, RE/MAX co-founder and chairman

Short SaleNot all eyes are on the election. Some of us are looking past it, focusing on changes and proposed changes to the mortgage and real estate markets that could undermine home sales, home values and consumer finances in the very near future.

One of those pending changes is the Mortgage Forgiveness Debt Relief Act of 2007 which is scheduled to expire on Dec. 31.

If this law is allowed to expire, unpaid mortgage debt will be treated as taxable income by the IRS, a huge financial burden for struggling homeowners who have recently engaged in a short sale or those who were planning to in the near future. The desirability of short sales could all but disappear if this law is not extended.

“If not extended, this has the potential of immediately reducing home sales by as much as 20%,” said Dave Liniger, RE/MAX co-founder and chairman, in an open letter to President Obama and Governor Romney. “Troubled homeowners who meet the qualifications for a loan modification or short sale are not likely to pursue either of these options if the remaining mortgage balance is considered taxable income.”

What would happen if short sales disappeared?

The extension of the Mortgage Forgiveness Debt Relief Act is very important for two main reasons:

  1. Simply stated, fewer short sales will mean more foreclosures. More foreclosures will mean additional downward pressure on local home prices.
  2. This law could lead to a lot more bankruptcies. If someone has lost their home and owes $50,000 to a lender, how can they realistically pay the tax bill on such money if the unpaid debt is now treated as income?

What would this expiration cost/save us?

Cost: Forgiven mortgage debt doesn’t simply disappear; lenders are on the hook for that money. As we’ve explained several times before, you can bet that any additional costs passed on to lenders will eventually be passed to consumers in one form or another.

But Liniger asked, what will the overall cost be if all these current and potential short sellers fell into bankruptcy or foreclosure? “What will the associated costs to society be then?”

Savings: “The [Congressional Budget Office] says a two-year extension will save distressed families about $2 billion,” said Liniger.

“In normal times, most of us would never consider forgiving unpaid tax bills, but these are not normal times.”

2 Responses to “We need to forgive unpaid tax bills”

  1. Mitch Mitchell Says: November 3rd, 2012 at 12:45 pm

    I totally agree with you. I’d also love to see more foreclosure forgiveness, especially if it’s associated with some of what I consider were criminal loan programs that set people up for failure and losing their homes.

  2. Ross Kilburn Says: November 7th, 2012 at 3:12 pm

    That’s a good summary Peter. However, in regards to the expiration of the Mortgage Debt Relief Act, I think the prediction of a 20% drop in home sales is overblown. The reality is that the insolvency exemption covers most short sellers. You can run the numbers on this calculator: http://www.sstaxrelief.com. Bottom line, the expiration of the Act isn’t going to be a huge deal.

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HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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