Patrick Boris, a banquet chef in Las Vegas, is inching closer to his own “fiscal cliff,” 2,100 miles away from the political brinksmanship under way on Capitol Hill. If Congress and the White House allow the country to go over the cliff, Boris figures he could owe federal income taxes on more than $100,000 in forgiven mortgage debt following the short sale of his two-bedroom townhome next year – a personal financial “disaster,” in his words.
In Sacramento, Calif., Elizabeth Weintraub, a real estate broker who specializes in short sales, says “many” of her clients have potentially taxable exposures on $200,000 or more in negative equity balances on their short sales if Congress fails to act.
Across the country, fears such as these are mounting. With the outcome of negotiations over taxes, spending and the federal debt uncertain, huge numbers of underwater owners worry that a single legislative provision that has been sucked into the “fiscal cliff” vortex could devastate them personally.
The issue is the extension of the Mortgage Forgiveness Debt Relief Act, which was set to expire Dec. 31. Dating to 2007, the law temporarily amended the federal tax code to allow mortgage debt on a principal home that is canceled by a lender through a loan modification, short sale or foreclosure to escape taxation as ordinary income. Several bills have been introduced in the House to extend the law for at least another year, and the Senate Finance Committee passed a bipartisan bill this summer that would do the same. But mortgage debt forgiveness is now on hold in both chambers, effectively a hostage until Congress works out a grand bargain – if it ever does.
Though it’s a relatively small and noncontroversial item compared with the multitrillion-dollar debates over taxes and spending, what’s striking about the mortgage debt relief provision is that it potentially affects such a large group of owners and could be extremely painful.
• Nationwide, according to mortgage-industry estimates, about 11 million owners are underwater. New data generated for this column by realty information company Zillow indicates that the average negative equity amounts of owners who are underwater – their loan balances exceed the property value – are higher than $90,000 in more than 64 local markets and more than $50,000 in 470. The average negative equity balance among such owners nationwide, according to Zillow, is $73,163.