Asset Protection is increasingly broadening in what people want from it, it’s not just about litigation and must include an analysis of ALL risks to our clients’ wealth including those posed by debt, investments, taxes, insurance gaps and most notably over the last 5 years, real estate. Below, Realtor Alex Goldstein, who has helped many navigate the most treacherous business waters in America, the real estate market in the Southwest, shares some startling details on a clock that’s ticking that even most lawyers don’t know about. – Ike Devji
Real Estate Time Bomb Affects ALL Buyers and Sellers in 2012
by Alex Goldstein, LuxeAZ.com
There is a ticking time bomb in the real estate market that’s going to blow up at the end of 2012, and this looming deadline will make a major impact by mid-year. Nobody is talking about it because it’s so big, everyone just wants to bury their heads in the sand,and pretend it’s going to go away. But this major shift is coming on December 31st, 2012, like it or not.
The problem lies, as many problems do, in Washington. In an effort to reduce thesuffering of underwater homeowners, the politicians passed the Mortgage Forgiveness Debt Relief Act in 2007.
This law has eliminated the tax burden associated with short sales and foreclosures for most homeowners. Prior to this law, if you were forgiven debt, you owed tax – the forgiven debt is counted as income. But thanks to the enactment of this law, income tax liabilities are extinguished for the vast majority of short sales and foreclosures.
This law, which is critical to distressed sales throughout the country, is set to expire on December 31, 2012. Expect to see the chaos begin by mid year. This change affects everyone, buyers and sellers alike. In Maricopa County in 2011, 60% of the homes sold were distressed properties. So what would happen if all short sales went away? What would happen if the number of bank foreclosures dropped dramatically as well? Both buyers and sellers are soon going to have a dramatically reduced set of options from what they have today.
There is no credible plan to extend the Mortgage Forgiveness Debt Relief Act. This is an election year, and there’s a huge budget crisis. So there is a very real and likely chance the year will end without any extension of this law.
That means that anyone who is short selling a home, or who is foreclosed upon, starting in January 2013, will be looking at a huge tax bill. Now, don’t you think the banks are going to use this to their advantage? You can expect the already crazy roller coaster of short sales to get crazier and crazier as we get closer to this deadline.
The banks have been playing hardball on short sales as much as possible, and they will soon have an 800 pound gorilla in their pocket. It’s a very simple proposition that the banks will be making: pay us now, or pay the IRS a lot more later. As much as people loathe the banks, they surely fear the IRS more.
Buyers: If you are planning to buy a home this year, there is a 35% chance that the home you want will be a short sale. Short sales are already treacherous and time-consuming. As we near this deadline, expect to see them get vastly more difficult, with banks making tough demands that neither buyers nor sellers will like.
Sellers: the bottom line is that if you’re thinking about selling your home, and you are underwater, you had better do it now or plan to hold for the very long term. If you have to sell after the expiration of the Mortgage Forgiveness Relief Act you could be making an enormous financial mistake.
In sum, you do NOT want to be starting a short sale in the 2nd half of 2012, not as a buyer nor as a seller. If there is even a modest chance that you want to buy a home this year, start writing offers and negotiating now.
If you are “thinking about selling” then get a proposal from an experienced agent today. The longer you wait, the greater the risk. The only thing they could change this scenario is if Washington decides to extend this law past the end of 2012. It is very difficult to imagine them doing this before the election. So that means that any relief, if it comes at all, would not be until the 11th hour. Thus, even if the law is eventually changed, expect pandemonium in short sales in the second half of this year.
Furthermore, if the law isn’t extended, there will be a lot of people who will be forced to hold onto their properties much longer than they wanted to do so. While they would like to sell, it will be more expensive for them to pay the taxes than to just hang in there.
That would mean a major decrease in inventory – both short sales and foreclosures would be dramatically reduced. The whole foundation of “strategic default” – walking away from a home and letting the bank deal with the problem – is about to go away. This has been a major driver of the real estate market for the past several years, and thus the absence of these transactions will represent a major shift.
In conclusion, whether you’re a buyer or seller, your options may be changing dramatically as we approach year end – and even more dramatically next year, if the status quo remains in Washington.
Alex Goldstein is with Realty One Group, and represents buyers and sellers of luxury real estate in Paradise Valley, Scottsdale, Arcadia, and the Biltmore. He can be reached at (480) 442-7325 or via email at email@example.com or you can learn more here: www.LuxeAZ.com