DETROIT — As lenders continue to see rising default rates and a backlog of foreclosures and bad debt piling up, short sales have been extremely attractive to sellers, banks, buyers and realtors. Instead of having a house sit vacant for months at a time, mortgage servicers have successfully used the short sale process to determine which houses are likely to foreclose, what they are likely to be worth after foreclosure, and what they are likely to lose during the foreclosure process in terms of time, value of the property, the prospects and costs of securing a buyer, and then cut their losses. 

However, the housing market is now on pins and needles because, you guessed it — the U.S. Congress has failed to act on a very serious challenge facing the American people. Congress recessed prior to the upcoming general election without passing a renewal to the tax exemption for the amounts written off on the short sale deficiency, this despite bi-partisan support for the program. In plain English, the amount of a mortgage owed after a short sale will be treated as income to all short-sellers on January 1st unless Congress acts to renew the exemption.

The result of such a failure to act could be nothing short of devastating to a U.S. housing market already struggling to make a comeback. The backlog of foreclosures could get larger, causing huge losses, a decline in the quality of the housing stock, and a slowdown in new sales- all culminating in a decrease in property value. 

Homeowners and realtors must be mindful that although it is likely that the lame-duck Congress will renew this exemption after the election, it is quite possible that an emboldened group of budget busters may very well prevent that from happening. In other words, this may be the last opportunity for many to engage in a short sale without getting stuck with a bill from the IRS for possibly tens of thousands of dollars. 

Tarek M. Baydoun is an Attorney and Counselor and Real Estate Law Specialist at The Meridian Law Group, of counsel to Allen Brothers, PLLC and can be reached by phone at 313.962.7777 or by email at tbaydoun@allenbrotherspllc.com