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Leaders warn against allowing short-sale provisions to lapse

Congressional representatives are being urged by business leaders and advocates to extend a measure that has provided financial relief for millions of Americans facing foreclosure. The provision, known as the Mortgage Debt Relief Act of 2007, has allowed scores of people facing foreclosure to avoid paying income tax on principal that is forgiven during the increasingly popular short-sale process. If the measure expires, Americans could be held liable for the taxes on the forgiven debt, which will be considered income under existing law.

Experts in the field say that the "phantom income" generated by the short sales generally does not benefit foreclosure victims by putting money in their pockets; rather, the fact that the debt forgiveness is not taxed can generally allow people to get back on their feet faster than they would otherwise.

The tax break, which has so far forgiven $1.3 billion in mortgage loan debt, is slated to expire at the end of the year. A bipartisan effort to keep the measure alive is under way, according to representatives on Capitol Hill, but the measure may fall victim to sweeping tax code change anticipated under the revamped Obama administration.

The expiration comes at a difficult time for banks and foreclosure victims alike, largely because short sales are being pushed as a viable option to foreclosure. Instead of foreclosing on a home and waiting for months for the home to process through the system, many banks are going through with the short-sale idea, which allows homeowners to quickly vacate the premises for a fast sale. The short sales are less damaging for owners' credit reports, and they often put money back in bank coffers faster than a traditional foreclosure.

The effects of the short-sale craze are beginning to show positive returns for borrowers. Lenders forgave about 11 percent of loan modifications in the second quarter of 2012, an increase of 82 percent from just one year earlier.

Politicians are seeking to extend the tax cuts, but they could be retroactively applied even if a decision is not reached until later in 2013.

Source: Bloomberg, "Congress urged to save expiring mortgage relief tax break," Clea Benson, Nov. 29, 2012.

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