The real estate blog.

President Bush gave struggling homeowners a gift on the 20th when he signed the Mortgage Forgiveness Debt Relief Act into law.

The act will remove tax liability from homeowners that complete short sales or foreclosures. Under current law, forgiven debt is treated as income and taxed accordingly. This is true unless the debtor can show they are financially insolvent.

Replacing the revenue earned from these types of taxes is an exclusion on 2nd homes that fall into the current primary residence exemption.

I see the new law as a mixed bag of sorts. It’s a lot like white elephant gift swapping during the holiday time where good gifts are mixed with gag gifts and someone ends up with the short end of the stick. Struggling homeowners are encouraged to get rid of

their homes by any means, people with two homes suddenly earn a tax burden if they sell, while real estate investors now have additional incentive to complete short sales.

While I think Congress has done a good job getting the law passed quickly, it only encourages more foreclosures and short sales, further driving down home prices. The unintended consequences may be staggering.

I wrote earlier that I didn’t think the law would pass with the change in taxation for 2nd home sellers, but the President has proven me wrong. The opportunity with this law is placed squarely on real estate investors and they should act accordingly.