DC Short Sales in a rush to beat the deadline
A soon-to-expire tax break for troubled homeowners is helping drive a spurt in DC short sales. Nationally, in the 3rd quarter ending Sept. 30, short sales have soared 22% over last year, according to a report released Thursday by online marketing company RealtyTrac.
A short sale is when a mortgage company agrees to accept less than what is owed to sell a property and helps homeowners get out from under a mortgage that they can’t afford or a mortgage that is “underwater”, in which the mortgage is greater than what the property is worth.
To encourage homeowners to cooperate and prevent foreclosure, the federal Mortgage Debt Forgiveness Act provided an incentive to homeowners by forgiving any tax on certain mortgage monies forgiven by the banks as part of a short sale; however, the Act expires on Dec. 31 and, unless it is extended, the IRS in January will start treating unpaid mortgage debt as taxable income. which would mean increased taxes of about $33,000 for the average short sale.
So real estate agents are pushing to get short sales done by the end of the year, worried that if they don’t, deals will fall apart with the prospect of big tax bills, according to Daren Blomquist, vice president of RealtyTrac. “They’re encouraging people to sell before the tax break ends,” he said. With the year-end deadline approaching, short sales could spike even more in the current quarter.
“If that law expires, homeowners who agree to short sales could see their income tax jump significantly because the portion of the unpaid loan balance not covered by the short sale proceeds will be considered taxable income in many cases,” Blomquist said.. “Both lenders and at-risk homeowners are realizing that short sales are often a better alternative than foreclosure,” said Blomquist. As evidence of that, in the 3rd quarter, more homes in foreclosure were sold as short sales than repossessed by banks and resold.
DC short sales are often a win win for banks. Foreclosures can be very costly. The mortgage company / bank gets stuck with legal costs as well as taxes and maintenance expenses. The longer it takes to foeclose the more the expenses mount. Short sales can happen much quicker.
Also homes generally sell for more in a short sale than ones foreclosure and resold by banks. The average sales price nationally is currently $191,025 for short sales vs. $161,954 for homes sold by banks in foreclosure.
Despite the rush in DC short sales, I do believe the law will be extended and improved as I reported my previous post Rules For DC Short Sales Are Changing but we are still waiting on the final announcement.