The efforts to extend the Mortgage Forgiveness Debt Relief Act into 2015 have grown more complex since the November election. After the election, a group called American for Prosperity (operated by the Koch Brothers who fund Republican elections) began pushing for the House to back off the current Tax Extender deal (a package of tax breaks that includes the short sale tax provision). The Koch Brothers asked Speaker Boehner to make one provision that would benefit Koch Industries permanent and delay action on all the other provisions.
Speaker Boehner seems prepared to back this strategy, but likely will back off when it comes down to the final vote. This issue is extremely in flux right now, but I can go through the most like scenarios:
1. Congress passes a bill that makes all tax extensions retroactive to 2014 but does not renew any for 2015. This would fail to provide real estate investors the ability to promote short sales as there will be no certainty about the tax treatment of the transactions. However, this would also open up the possibility of making the Mortgage Debt Forgiveness Relief Act permanent.
2. Congress passes a version of the Koch Brother language whereby the research and development tax breaks are permanent and the other tax breaks are retroactive to 2014 and extended to 2015. This language would pass the House easily, but may fail in the Senate. Even if it passes the Senate, President Obama has stated he would veto the bill, and there would be no chance the Senate could get the 66 votes to override the veto. However, if Congress does pass the bill there could be enough pressure on the White House to reconsider the veto.
3. Congress fails to reach any kind of agreement (meaning the Senate fails to pass the House language) and the Tax Extenders package fails. This would result in distressed homeowners who utilized short sales in 2014 paying taxes on $8.1 billion in phantom income. Again, this would provide an opportunity to make the short sale tax break permanent in 2015, but the uncertainty would hamper the utilization of the transactions.
This issue should be resolved within the next couple weeks, and I will update everyone on developments as they occur. Below is a summary of the language regarding short sales in the Tax Extender package:
Under current law, taxpayers who have mortgage debt canceled or forgiven after 2013 may be required to pay taxes on that amount as taxable income. Under this provision, up to $2 million of forgiven debt is eligible to be excluded from income ($1 million if married filing separately) through tax year 2015. This provision was created in the Mortgage Debt Relief Act of 2007 to shield taxpayers from having to pay taxes on cancelled mortgage debt stemming from mortgage loan modifications, through 01/01/2010. It was extended through 01/01/2013 by the Emergency Economic Stabilization Act of 2008; and extended through 01/01/2014 by the American Taxpayer Relief Act of 2012. A two-year extension of this provision is estimated to cost $5.4 billion over 10 years.
FHA Anti-Flipping Rule Suspension Expires in 2015
FHA initially approved the anti-flipping rules in 2003 as a fraud prevention tool. The provision bans FHA from insuring loans on any sale in which the seller purchased the property within 90 days. FHA has suspended the rule a number of times, but is now committed to reinstating the rule in 2015. FHA has put themselves in a tough position by reinstating this rule. There is a substantial public record of FHA making glowing statements about home rehabs, its benefits to communities, and dismissing any real threat of rampant fraud by suspending the anti-flipping provision. The benefits outlines by FHA seem to outweigh any hypothetical fraud prevention benefits the provision may have, and of which there is no data.
Starting in 2015, lobbying efforts with members of Congress along with officials from FHA and HUD will begin in order to identify effective fraud prevention measures that do not interfere with legitimate transactions and the efforts of investors to rebuild communities.
Existing Home Sales Data: October 2014
Existing home sales increased 1.5% in October 2014, up 2.4% in September and up 2.5% from October 2013;
Median existing home prices in October 2014 were $208,300 5.5% higher than October 2013;
All cash purchases: 27% of purchases in October 2014 were all cash, up 3% from September and down 4% from October 2013;
Individual Investors: Individual investors purchased 15% of existing homes in October 2014, up 1% from September 2014 and down 4% from October 2013. 65% of these purchases were all cash;
Distressed Sales: Foreclosures and short sales comprised 9% of all existing home sales in October 2014, down 1% from September 2013. 7% were foreclosures and 2% were short sales.
Distressed Sales Discounts: Foreclosure discounts for October 2014 were 15% (up 1% from September 2014). Short sale discounts for September 2014 were 10% (down from 14% in September 2014).
