I am not sure why, but there isn't much talk yet about extending the Mortgage Forgiveness Debt Relief Act into 2015.
Before you (yawn) and figure this topic doesn't impact you, you might want to reconsider your position.
In fact, this issue will have a significant impact on home values for the next five to ten years, so you might want to take the time to speak your mind.
The Mortgage Forgiveness Debt Relief Act Extension And Debt Cancellation
Only our government could create a program with this long of a name, but in its defense, the Mortgage Forgiveness Debt Relief Act has been a major contributor to the housing market recovery that is ongoing throughout most of the United States.
As the IRS website explains it,
If you borrow money and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is normally reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt. The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.
Originally scheduled to end in 2012, it was extended another year to cover 2013 as well.
But not 2014.
Not unless Congress decides to extend it again.
Consider this your cue to get involved.
Why The Mortgage Debt Relief Act Needs To Be Extended
There are millions of people in the US who owe more on their homes than they are worth. And we know many of them would like to sell their homes, but they are trapped again. Many will want to do a short sale.
If these upside-down homeowners were to sell a home today (meaning go to contract today but close after the turn of the year), they would incur an income tax penalty for any debt relief they obtained through a short sale.
To determine how many people might find themselves in this position, we can take a look at information gathered and prepared by the National Association of Home Builders regarding the length of home ownership in the United States.
The table above shows that roughly 30% of single family homeowners move within the first 6 years of home-ownership, while 50% move within the first 15 years. That means people who paid a premium for their homes during the housing bubble (2004 to 2007) will be hitting the market in mass from 2010 to 2022. Basically, this means were are really only 3 years into the recovery for these upside-down homeowners.
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Of course, these statistics were created from past home sales, prior to the housing bubble. The rate of sales "back then" was not abnormally impacted by owning a home with a negative value, so people who no longer wish to own their upside-down home might be moving faster than was historically anticipated. Does this mean there could be many more sellers wanting to hit the market right now?
Pent Up Supply Is Slowing The Market
If the Mortgage Forgiveness Debt Relief Act truly concludes at the end of 2013, I am concerned that people will have to wait to sell their homes. While this doesn't seem alarming, consider the fact that even with historically low mortgage interest rates, the Tallahassee real estate market is trading at about 70% of its "normal" rate.
That means only 7 out of 10 families who would normally be moving are doing so right now. This means we are in an environment where pent-up supply is growing, and we could end up with another melt-down if people stay trapped in homes that they either no longer want or perhaps they cannot afford to own.
By forgiving the income taxes on cancelled debt, Congress can make it easier for these trapped homeowners to make a move. In fact, this has exactly been the case for the past six years, and the program's success should be reason enough to extend it for several more years. Not just for 2014, but long enough to allow home values to return to levels high enough to end the need for short sales altogether.
Please consider taking the time to reach out to your elected officials and demanding a multi-year extension to the Mortgage Forgiveness Debt Relief Act, it could have a huge impact on the economic future of our Country.
Joe Manausa, MBA is a 26 year veteran of real estate brokerage in Tallahassee, Florida and has owned and managed his own company since 1992. He is a daily blogger with content that focuses on real estate analytics and providing his clients with a tactical advantage in today's challenging market.