http://www.inman.com/buyers-sellers/columnists/tara-nicholle-nelson/are-short-sales-ruining-home-values


Q: My neighbors bought a home for their mother, who has since passed away. They owed $125,000 on the mortgage. The bank allowed them to do a short sale for $56,000. The three daughters who bought the home for their mother have considerable assets. How can they be forgiven for this debt by the Internal Revenue Service if they are not distressed?

The people who are doing the short sales are ruining the values of our homes, yet we have always made our payments on time, and owe much more than these short sales. Can you please explain this to me?

A: A month ago, I wrote about the Mortgage Debt Forgiveness Act, under which some folks who sell their homes for less than they owe on it (e.g., a short sale) are exempt from being charged income tax on the debt that is forgiven by their lender(s), if the short sale is completed before the end of 2012. Many upside-down homeowners who are staying on time with their payments, like yourself, have cried, "That’s just not fair!" This took me back to my childhood, the days when I would say those same exact words -- "it’s not fair" -- only to hear my Dad, a former Marine, deadpan, "Life isn’t fair."

I won’t be so gruff as my Dad, but I submit to you that (a) your diligent on-time payment history has and will be rewarded; (b) life, and the situation are not fair, but fairness is beside the point here; and (c) your interests are better served by this law than they would be without it.

Mindset Management

First things first. The level of detail you have provided isn’t sufficient to fully understand your neighbors’ situation. Was the property owned by one daughter, all the women, the mother’s estate or a trust? That would have a bearing on why a short sale would have been allowed. Also, many people who appear to or once did have "considerable assets" are actually drowning in credit-card debt, upside down on their homes, and taking a bath on the stock market -- looks can be deceiving. My point is that there’s a lot about that scenario that may not be as it appears, so don’t assume that they are in an enviable position.

On the other hand, don’t assume that your position is unenviable, or that you are a sucker for being the nice guy and paying your mortgage and other bills on time. The algorithms used to calculate FICO scores were recently revised to render short sales about equally as damaging to the seller’s credit as a foreclosure. In the credit-crunched market we’re facing these days, having a stellar credit score is a very valuable currency, which you can obtain only by doing what you are doing and paying your bills on time. Those who have done short sales or lost their homes to foreclosure will simply not have the same access as you do to credit and even certain employment opportunities, which require a strong credit history.

Need-to-Knows

When it gets down to your question of why the IRS would allow this to happen, first let’s be clear -- it is a mortgage lender who actually forgives debt; all the IRS is doing right now is refraining from charging income tax on debt that is forgiven by the lender. And let me tell you what -- it may not seem fair, but it is actually somewhat slowing the hemorrhage in your home’s value.