Like many South Floridians, Victoria Woolford is trying to sell her home for less than she owes -- while doing her best to brush off the nagging reminder of a ticking clock.
Unless Congress grants an extension, a law created in 2007 to help troubled homeowners expires at the end of this year. It allows them to avoid paying taxes on forgiven debt for their primary residences.
Some sellers will face daunting tax bills once the law expires. If, for example, a lender wipes away a $100,000 debt in a short sale, the typical South Florida borrower could owe more than $25,000 in taxes. The only way to avoid the hit would be to file for bankruptcy.
Because lenders often take several weeks or months to approve short sales, homeowners who don't start the process soon are likely to miss the deadline, real estate agents and lawyers say.
"We don't want to scare anybody, but they can do the math," said Joe Kohn, a Fort Lauderdale real estate lawyer.
Woolford paid $320,000 for a four-bedroom house near West Palm Beach in 2010 but says it's worth only about $250,000 now. Because of a pay cut, she applied for a short sale this spring, but she said the buyer walked away as the deal dragged on without a resolution.
The aviation consultant said a second buyer is getting antsy, and there's still no word from the lender, Wells Fargo.
After what she's been through already, she can't fathom the possibility of a big tax bill to boot.
"If you can't afford the mortgage, how can you afford the taxes?" said Woolford, 39.
The Great Recession combined with plummeting home values have left millions of Americans in a financial crisis over the past six years.
More than 412,000 South Florida homeowners are "underwater," owing more than their properties are worth, according to real estate website Zillow.com. It could be a decade or more before values return to a level that allows these homeowners to break even in a sale.
In many cases, a short sale is the best option for escaping a burdensome mortgage. The seller avoids foreclosure and often can negotiate with the bank to reduce or eliminate the deficiency – the difference between what's owed and what the house sells for.
Since 2007, more than 53,000 homeowners in Palm Beach and Broward counties have completed short sales, according to the RealtyTrac listing firm. Over the same period, lenders have repossessed nearly 85,000 homes in the two counties, RealtyTrac said.
To apply for a short sale, a homeowner must have a financial hardship, such as a job loss or large medical expenses. New government guidelines that take effect in November allow for a short sale if the homeowner must relocate more than 50 miles away for a job transfer or new position.
After finding a buyer, the seller submits to the lender the written contract, along with pay stubs, bank statements and tax returns. Then the waiting begins.
Even though the short sale process has improved in the past year, with banks responding to offers more quickly, delays are still common, agents and sellers say.
Given the depth of the housing bust, the law should be extended for at least another year to give borrowers relief and to help clear the glut of distressed mortgages, said Guy Cecala, publisher of the Inside Mortgage Finance newsletter.
While there appears to be bipartisan support for keeping the law, some analysts say an extension may not come until after the presidential election in November.
Others say the law may well expire, but Congress could grant an extension early next year and apply it retroactively.
Because of the uncertainty, homeowners should assume no extension is coming, said Jim Heidisch, broker with Campbell and Rosemurgy in Pompano Beach. He said many of his clients are stunned to learn of the looming expiration.
As the end of the year draws closer, short sale applications are likely to increase, and the backlog could result in frantic homeowners struggling to close, real estate professionals say.
"I'm not making any plans for Dec. 31," said Gary Singer, a real estate lawyer in Sunrise. "I expect to be in the office very late."
Powers@tribune.com, 561-243-6529 or Twitter @paulowers
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