If Congress drives the economy off the “fiscal cliff,” wave goodbye to short sales that have helped the housing market get back on its feet.
At risk is a provision that erases taxes on selling a home for less than what’s owed to the bank.
Expiration of the tax treatment would create a major new headache for the one in four homeowners who owe more than their house is worth. Those “underwater” sellers would have to come up with a big check for Uncle Sam to pay the tax on the difference.
That “would be a blow to the housing recovery,” said Paul Diggle, a housing economist at Capital Economics. “The increased use of short sales, rather than foreclosures, has become an important support to the recovery.”
Currently, roughly a quarter of all home sales are short sales. There are several reasons they’ve become much more common in the aftermath of the biggest housing bust since the 1930s.