As we near the end of the year, one of the things that will change in 2013 related to housing is the ability to avoid taxes on mortgage debt that's been discharged. A provision in the Mortgage Debt Relief Act of 2007 that has allowed borrowers to avoid paying tax on housing debt that was either reduced or relieved through mortgage restructuring or foreclosure, will no longer be in effect as of January 1.
Essentially, when you owe debt to someone and they cancel or forgive that debt, the canceled amount may be taxable. Taxpayers, generally, have been able to skip paying this tax around mortgage debt forgiven in the years 2007 through 2012, thanks to the Mortgage Debt Relief Act provision.
From the IRS:
This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.
This likely has fed the 35% increase in short sale volume across the U.S. over the last year, as Socketsite points out. Whether or not you think this actually could've or should've been a higher number doesn't matter as much as the evidence that this particular tax relief project at least worked to push through a big chunk of loan restructuring and foreclosure.
With the rate of short sales and foreclosures now reversing, this would seem another obvious signal that we are indeed moving into an entirely different phase of recovery. The first phase had to put all the debt back into the market – and spread the pain involved in doing that. Now the second phase is about seizing opportunities to ride the rebuild.
2013 will be a year of building, not recovering. New initiatives should be about stimulus, not relief. Here's to a growth year!