As the melodrama in Washington unfolds and we towards the so-called Fiscal Cliff other important legislation gets lost in the noise. One law critical to the real estate business that is due to sunset on January 1 is the law that gave relief to those going through foreclosures or short sales from being taxed on the loss that the bank took. Most people can probably recall that banks were issuing 1099 Forms to foreclosed homeowners for that difference, essentially treating it as if the foreclosed homeowner had been handed the difference and now owed taxes on it just like ordinary income. The Mortgage Forgiveness Debt Relief Act of 2007 gave relief to those foreclosed homeowners by preventing the banks from issuing those 1099’s – at least the banks that took Federal TARP money during the bail-outs.
This legislation, flawed though it may be, was critical to supporting the housing recovery by allowing short sellers to get out from under their old houses and not strapping them with an additional debt that would prevent them from buying a new smaller house that they could afford. Other laws that rode along with this law added provisions for a modest move-out payment to the short-seller to help them relocate. Some people objected to that, saying that it encouraged the bad behaviour that got the short sellers into that situation in the first place. I don’t agree with that view.
So, now this legislation is due to expire at the end of the year. There was legislative support to renew or extend the provisions of this legislation; however, that got caught up in the panic and noise about the Fiscal Cliff and is now buried somewhere in Washington, along with many other critical bills. The National Association of Realtors is lobbying as hard as it can to get attention back on this legislation, so that it doesn’t expire, but the drama over Fiscal Oblivion continues to dominate the Washington scene.
There is a sizable (and growing) contingent in Washington that now seems to believe that we should just go ahead and go over the Fiscal Cliff and then sort out which things really need to be fixed and which can just be allowed to happen – sort of like Thelma and Louise driving off the cliff at the end of that movie and then checking the back seat to see if there are any parachutes that they might use. There was a reason that they didn’t show what happened next in that movie! Some things can’t just be “fixed” later, if they’re allowed to happen.