A key tax cut designed to help improve the struggling housing market is set to expire at the end of this year.
The Mortgage Forgiveness Debt Relief Act was initially created by Congress and signed by George W. Bush in September of 2007 to mitigate foreclosures created by the collapse of the U.S. housing market. One of the main provisions of the act is that it removes the tax liability of homeowners completing a short sale.
When banks reduce mortgage balances, the amount forgiven is normally counted as income to the borrower. The Mortgage Forgiveness Act absolves this tax obligation. If allowed to expire, it could mean the end of a homeowner's ability to successfully complete a short sale.
Short Sales have become a viable exit strategy for many homeowners hampered by mortgage debt, and many economists consider them to be a valuable and essential tool for the recovery of the housing market.
Extension of the Debt Relief Act is by no means certain.
There is ongoing debate in Congress, and officials from the National Association of Realtors and the Mortgage Bankers Associationare providing supporting the extension. Some housing analysts forecast a spike in short sales prior to year end, although some Capitol Hill observers think that the Mortgage Forgiveness Act is likely to be extended.