With the country hanging off a fiscal cliff the housing programs started in the Bush and Obama eras will be among the victims if Congress fails to act on an extension of the recession-fighting initiatives. The ability to write off deficiencies that are generated as a result of a short sale or a principal reduction will be history at the end of this year if Congress does not act to extend the laws that created the tax savings.
There are currently about 5 million delinquent mortgages in the foreclosure pipeline and short sales have in the past couple years become especially popular to save homeowners from foreclosure.
Because a short sale or a principal reduction as part of a loan modification are debt forgiveness they are normally taxable events. In 2007 Congress passed the “Mortgage Forgiveness Debt Relief Act and Debt Cancellation.” That act is part of many Bush era tax cuts that expire at the end of this year. Without an extension, short sales could grind to a halt, as could mortgage modifications that include principal reduction.