Short sales of homes surge as tax break to expire
Homeowners and banks are accelerating sales of properties for less than the amount owed as a U.S. law that gives them a tax break expires at the end of the year.
The transactions, known as short sales, increased by 35 percent in the third quarter from a year earlier, while sales of bank-owned homes dropped 20 percent, according to a report today by mortgage data seller Renwood RealtyTrac LLC. Together, they accounted for 41.5 percent of home purchases in the quarter.
Short sales have accounted for as many as 1.1 million transactions since 2009, helping to reduce the inventory of homes owned by banks that can blight neighborhoods and flood the market. Barring a last-minute extension of the 2007 Mortgage Forgiveness Debt Relief Act, homeowners will be taxed on the forgiven principal. With Congress focused on the so-called fiscal cliff, federal spending cuts and tax-rate hikes set to kick in on Jan. 1, the law may not be extended, leading to a drop in short sales and a rise in foreclosures.
"If you're struggling to pay your mortgage, it's not likely you can afford an extra $25,000 or $35,000 tax bill to avoid foreclosure," said Edward Mills, a financial policy analyst at FBR Capital Markets in Arlington, Virginia. "Mortgage forgiveness has become part of fiscal cliff politics."
The Internal Revenue Service typically taxes forgiven debt as income to the debtor. For short sales, the average price tag was $94,896 below the mortgage on the property, according to the RealtyTrac report. Tacking that onto borrowers' income would not only raise the amount of taxes due it could push them into a more expensive tax bracket.
Short sales are better for the real estate market than sales of bank-owned properties, said Daren Blomquist, vice president at RealtyTrac. The average price for a short sale was $186,000 in the third quarter, compared with an average bank- sale price of $161,954, which was down 7 percent from the second quarter as empty homes lost value, Blomquist said. Bank-owned properties often are unoccupied for six months or more, while short sales result in new owners moving in directly after the purchase, he said.
"The tax break going away could really stifle the upward trend in short sales we've seen this year, and by extension some of the rebound we've seen in the housing market," Blomquist said. "People will shy away from agreeing to a principal reduction because they won't be able to come up with additional funds to pay a new bill."
Sales of homes in some stage of foreclosure accounted for 20 percent of all U.S. homes sales, the report said. The share was highest in Georgia, at 38 percent, followed by California, at 36 percent; Arizona, at 34 percent; and Nevada, at 31 percent.
Short sales of homes that weren't in foreclosure rose 17 percent in the third quarter, the data company said, without providing a number because the figure is based on a sampling of the market. Those sales accounted for 22 percent of all U.S. sales, and were the highest in Rhode Island, at 58 percent; Connecticut, at 47 percent; and Massachusetts, at 44 percent, according to the report.
The expiration of the tax break comes at the same time that federal policies are making debt forgiveness more common. Advocates for homeowners and mortgage industry participants say the law's expiration could jeopardize progress made this year working through the backlog of troubled loans resulting from the six-year housing decline.