As the expiration date for current tax laws grows nearer, the number of short sales for homes is increasing. Foreclosure sales dropped 20% during the third quarter while short sales increased 35%.
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Short sales occur when homeowners and banks agree to accept a lower price for a house than it is worth.
There may have been as many as 1.1 million transactions since 2009 and have been a major factor in reducing the inventory of homes for sale. It was feared that the number of foreclosure homes would flood the market but the increased numbers of short sales has helped to prevent that.
Unless there is a last-minute extension of the 2007 Mortgage Forgiveness Debt Relief Act, homeowners will be taxed on the forgiven principal. The IRS typically taxes forgiven debt as income to the debtor.
Congress is focused on avoiding the fiscal cliff and trimming the deficit, which may mean that the Act will not be extended. That will result in many more foreclosures and far fewer short sales.
This would be a negative for the housing market. Short sales are better because, even though houses sell at reduced prices, those prices are above foreclosure sale prices.
Short sales also result in new owners moving in sooner after the sale. Foreclosed property sales usually see the homes sitting vacant for six months or longer.
Short sales of homes that were in some stage of foreclosure rose 20% in the third quarter; those not in the foreclosure process rose 17%.
The debt-forgiveness bill is caught up in the fiscal cliff negotiations
but may be attached to a broader bill targeting the fiscal cliff.
If the bill is not extended, many underwater homeowners could be facing a fiscal cliff of their own.