Tax Cuts Expiration - Negative Impact on Short Sales & Home Values

The end of the Tax Incentive or the waiver of Federal Income Taxes on Short Sales and Foreclosures will expire on December 31, 2012.  Since short sales make up 40% or more of the housing markets in many parts of the country, this in all probability will have a large impact on the real estate markets, property values, banks, Fannie and Freddie, etc.  Debt is typically not "forgiven" in the foreclosure process, so the huge impact of the expiration of this act is on the Short Sale Process. 

I don't see any news on this and it is unbelievable that no one is discussing the huge impact this will have on our still fragile economy.  The Debt Forgiveness Act of 2007 waived the income tax on "forgiven debt" in a short sale.  So if you had a $300,000 home sale as a short sale and owed $400,000 on the home, the $100,000 that the bank wrote off "forgave", would not be a taxed. 

Without the debt forgiveness act borrowers would be taxed on the $100,000.  Since they got use of the money to either pay for the house or through a refinance of the house, which made the money income to them instead of a loan.  Since they do not have to pay it back on the short sale, it is no longer a loan and they are taxed on the money as income, at least they will again have to pay these taxes after December 31, 2012 if the Debt Forgiveness Act of 2007 is not extended. 

Many distressed homeowners will now be forced into Foreclosure as the alternative since short sales will have significant tax impact.  This will erode home values in the market and increase foreclosures.  Short sales have been preferred by lenders as they netted much higher sales prices on Short Sales and smaller loses than foreclosures.

It appears that the expiration of the Tax Cuts will have serious implications on the real estate community as a whole.  What do you think about this impact and how it will effect not only the real estate sales industry, but how it will impact home values with lower sales prices of these distressed properties as foreclosures??