It’s not just the Bush tax cuts. At the end of this year another tax law expires. In 2007 Congress passed the law that forgave the taxes due on the imputed earnings from selling your home at a loss.
Example: You sell your house for $100K. But your mortgage is for $150K. You lost $50K and in a short sale, your bank agrees to absorb the loss. The IRS considers that INCOME and is taxable at whatever rate you pay.
For some homes, the value of your loss can be several years of pay. But since that isn’t REAL money or income, there is no rational way you can prepare for it and save some of your ill-gotten gains to use for paying taxes.
Yes. Only the US government can consider huge financial losses as “taxable income”. This will make it even harder for people who are underwater to sell their homes using short sales. Instead they will be driven into bankruptcy to unload their homes. Given that as an alternative, it makes no sense for them to cooperate with their creditors. Thus the market gets the wrong signals and the economy continues to spiral downwards.
The term blood from a turnip comes to mind. How can Congress or anyone reasonably expect to collect any revenues at all from people who have lost all their home equity and are now being forced into bankruptcy?