Extension of Mortgage Relief Act Brings Mixed News to Real Estate Investors

Real estate investors are unlikely champions of the Fiscal Cliff deal, but its passage

US Mortgage Relief

US Mortgage Relief

brought some good news. Despite obvious sore points in the deal — higher capital gains taxes, for example — investors who like to purchase distressed properties in short sales may cheer the one-year extension of the Mortgage Debt Relief Act, which was written into the Fiscal Cliff legislation.

The Mortgage Relief Act, passed in 2007, was set to expire Dec. 31.  But Congress agreed to extend the act until Jan.1, 2014.  This action will likely keep many more homes on the market and available for short sales.

If the Mortgage Relief Act had not been extended, families who sold their homes for less than they owed would have had to pay income tax on the difference.   Many homeowners might have let their homes slip into foreclosure to avoid paying the taxes.

Reduced Supply of Foreclosed Homes

The extension of the Mortgage Relief Act will keep more homes on the market for short sales and stem the supply of foreclosed properties.

Before the extension, Brad Bates, a retired air traffic controller, was facing a choice of paying a $25,000 tax bill if he accepted a short sale offer on his home or letting the bank foreclose on his property.  Since the tax bill might have pushed Bates and his wife into bankruptcy, the couple were considering foreclosure as the better of two bad choices, he told Drew Harwell, a reporter for the Tampa Bay Times.

Bates lives in Florida, where homes in short sales sold for about $103,000 less than what the homeowner owned on his property, according to the Tampa Bay Times.  Real estate investors who buy pre-foreclosure sales in short sales saved about 26 percent over the price of a non-foreclosure home in the second quarter of 2012, according to Realty Trac.

Which is Better:  Short Sale or Foreclosure?

Foreclosed homes, which Realty Trac says sold for 32 percent less than the price of a non-foreclosure home, remain a better bargain for investors.  Investors who buy foreclosed properties also generally face shorter closing times and reduced closing costs.

Experienced real estate investors may regret the extension of the Mortgage Relief Act because the supply of foreclosed bargains will lower.

But the extension could mean lower prices for buyers of short sale properties.  And these types of properties hold advantages for investors, particularly those new to real estate.

Short sale properties are more likely to be in better shape than foreclosed ones.  Anyone who is forced by a bank to vacate his home may deliberately damage the property before leaving.  And any vacant property, even if left unharmed by its owner, can sustain all types of damage, including frozen water pipes and vandalism.   If you buy a home at auction, you may not have any opportunity to inspect a home before buying it or to learn about any liens on the property.


For seasoned real estate investors, the extension of the Mortgage Relief Act means business as usual.  For newcomers, the extension represents a one-year opportunity to shop for slightly pricier, but safer short sale properties.  No investor should count on a further extension of the act.  So it makes sense to buy now based on current availability and your investing preference.

The extension may make refinancing mortgages or second mortgages more attractive, but keep in mind that the extension is guaranteed only through Dec.31 of this year.

If you’re selling an investment property in 2013, here is how the Fiscal Cliff deal could affect your capital gains tax consequences:

For individuals who earn $200,000 or less or for couples filing jointly who earn $250,000, the capital tax rate of 15 percent remains the same.  Anyone or couple who makes more will pay an additional 3.8 percent tax to help fund President Obama’s healthcare program.  Those making more than $400,000 singly or $450,000 jointly will see their capital gains tax increase to 20 percent, according to Forbes.com.

Buying Canadian Real Estate

Real estate investors who invest in Canadian properties don’t escape the impact of the Fiscal Cliff legislation as they must still pay capital gains taxes here.  U.S. citizens can buy Canadian property without government interference and can get the same mortgage rates as Canadian buyers, although they will likely have to make larger down payments.  Current mortgage rates in Vancouver range from 2.7 percent to 3.8 percent depending on the length of the term.  This compares to rates across the border in Seattle, where rates in January are about 3.25 percent.

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