Quoted in a Sacramento Business Journal article about the possible extension of the Cancellation of Debt Forgiveness for short sales...

I was quoted in a Sacramento Business Journal article by Sanford Nax this week...the article was about the Sacramento real estate market, and specificially the subject matter of the part I was quoted for dealt with the "Cancellation of Debt Forgiveness" -- that expires at the end of 2012. You may know this as the rule that provides short sale sellers an exception from having to pay state and federal income tax on "debt forgiveness" (the difference between the mortgage amount owed vs the amount the property sells for) from a short sale. Right now there are wheels in motion to extend this beyond the end of 2012, but nothing has been solidified yet by our lawmakers. A few years ago in 2007, this provision was enacted and set to expire on December 31, 2009. It did expire, and then lawmakers acted, and it was extended through the end of 2012 a few months later in spring of 2010 -- but was retroactive to January 1, 2010.

I think lawmakers will end up extended this again, but it will happen the way it did last time -- it'll happen this spring and be retroactive to January 1, 2013. No guarantees obviously, but that is what I think will likely happen.

If the "Cancellation of Debt Forgiveness" provision were to permanently go away and weren't extended by the state and federal government, I think it will still make sense for many homeowners to do short sales. Unfortunately not all underwater homeowners will get good tax, legal, or real estate advice and won't realize the advantages of doing a short sale over letting the house go in foreclosure.

I always recommend that short sale sellers get tax advice from qualified professionals before doing a short sale. The current laws don't apply to all homeowners and all mortgage debt as it stands today. Often times homeowners are "financially insolvent" and would not be subject to the tax burden associated with the debt forgiveness anyway. Or with a CPA's assistance, homeowners can find ways to mitigate the tax consequences.

There are many other advantages to doing short sales vs allowing a house to be foreclosed. MANY short sale lenders now offer programs to compensate a homeowner to do a short sale -- up to as much as $45,000 under some circumstances, though more frequently I see $3,000 - $10,000 offered. Those incentives are not offered in a foreclosure. The credit consequences are far less devastating doing a short sale - the FICO score generally doesn't drop as much and rebounds faster. A person with a short sale on his/her credit will generally have a shorter waiting period to buy a home in the future with a short sale (0-4 years depending on credit score, downpayment, how far delinquent the payments were at the time the home was sold), vs a foreclosure (4-7 years depending on the credit score, downpayment). If the mortgage debt was refinanced, with a short sale there generally will not be any continuing liability for the forgiven debt, where after foreclosure the seller could still be liable for the remaining balance of the mortgage amount minus the value of the house at the time of foreclosure.