Posted on August 21, 2012 by Jason Munsterteiger
Surprisingly, there is some encouraging news out of Washington, D.C. for financially stressed homeowners across the country. The Senate Finance Committee approved a bipartisan bill that would extend the Mortgage Forgiveness Debt Relief Act through 2013. This is important as it spares homeowners who receive principle reductions on their mortgages from being hit with hefty federal income taxes on the amounts forgiven. Otherwise, millions of homeowners who leave their homes could experience massive financial stress. The old law is set to expire in December of this year and because it is an election year, the bill might have difficulty passing this calendar year. The National Association of Realtors and the National association of Home Builders will be lobbying Congress to get this bill to the President’s desk to keep this delicately stable market from back sliding to a foreclosure driven market. This puts people out of their homes and does no one any favors.
The extension would affect millions of families who are underwater on their loans, or are delinquent on their payments and looking at a foreclosure, short sale, or a deed-in-lieu of foreclosure settlements. Under federal law, all types of forgiven debt are viewed as ordinary income and subject to regular tax rates. A homeowner who has a $300,000 loan and sells his home at $200,000 has a $100,000 gain and would be taxed at his/her adjusted tax rate. On January 1st, all mortgage balances written off by banks would be fully taxable. This proposed extension will have a good chance to pass in the senate but may have a more difficult time in the U.S. House where some see this extension as costing the U.S. Treasury $2.7 billion dollars in 2013, and the U.S. Government is starved for cash. Due to the popularity of the housing deductions and credits, it is my belief that is should get passed and signed into law. It may be debated and deliberated for a few months, but the housing market is fragile at best and these housing deductions will keep the market stable until the economy improves.