3OYS: Short-sales plummeting after tax break expires

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By Christina O'Haver By Christina O'Haver

PHOENIX -- There have been numerous short-sales over the years but now those sales are plummeting, according to Scottsdale mortgage broker and real estate specialist Dean Wegner.

He said the reason for the sharp decline is the tax liability short-sellers are now facing.

"Anybody short-selling or foreclosing on a house going forward from here is going to have taxable exposure on the forgiven debt to the IRS," Wegner told 3 On Your Side.

In 2007, Congress passed the Mortgage Forgiveness Debt Relief Act to help people who were struggling financially and losing their homes.

If a homeowner owed $300,000 on a house, for example, but the lender allowed the homeowner to short-sale it for $200,000, that price difference was forgiven. The homeowner did not have to pay the lender that $100,000, and the Internal Revenue Service did not tax it.

But that law expired Jan. 1, and the government now sees that $100,000 as income for the short-seller and wants to tax it.

"They could be looking at a maximum of $25,000 in taxes," Wegner explained.

He said distressed homeowners need to remember this because the 2007 tax law will no longer protect them.

Not only are many struggling homeowners unaware of the expiration, but even some realtors don't realize it, Wegner said. As a result, some homeowners currently short-selling may get a rude awakening when they realize they have to write a hefty check to the IRS or learn the IRS issued a lien of some kind.

There is a chance the law could be renewed by lawmakers, but for now it is considered expired.

"There are congressmen working on seeing if they can extend this," Wegner said. "But I think there needs to be more pain from the public showing them that we can't afford this."