Congress Allows Mortgage Forgiveness Tax Break to Expire

For the past 6 years, Americans have had access to a mortgage forgiveness tax break that was designed to help those who lost their homes in a foreclosure. However, when 2013 ended, so did this tax break and Congress is under fire for allowing it to slip past them without an extension. This is particularly bad news for struggling homeowners who could have continued to benefit from it. Without it, anyone currently selling their home could get dinged with very large tax bills. There was plenty of bipartisan support for extending this law, however, lawmakers failed to do so before its expiration date was reached on December 31, 2013.

This tax break, called the Mortgage Forgiveness Debt Relief Act, was enacted by Congress in 2007 when the housing market was collapsing. It allowed homeowners to waive taxes related to aid that they received from banks in the form of lessened mortgage debt and short sales. As a result of this law, each household was allowed as much as $2 million in forgiven debt to be exempted from their federal taxes. After all, if they couldn't afford to keep their homes, they probably couldn't afford to be slapped with a large tax bill as well.

The LA Times interviewed Kevin Stein, the associate director of the California Reinvestment Coalition about this law's expiration. He described it as a "hit on people who are meant to be helped." Homeowners will no doubt feel it in 2014. He continued, "it is a big deal and it would be very unfortunate if, due to Congress' inability to act, people will suffer."

While there is still plenty of pending legislation that could potentially extend this tax break through 2015, it is entirely up to lawmakers to make it happen. They will be considering extending dozens of other tax provisions that also expired at the end of 2013. This means that there could be a mortgage forgiveness tax break passed even though it expired. It was originally set to expire in 2009 but was extended twice.

There are critics who say that it is time to move on from this tax break because waiving all these fees means that the federal government is missing out on revenue that could be put right back into the economy. However, there are many others who feel that this tax break is so vital that it should be immediately restored. Even though housing prices are on the rise and there are fewer homeowners currently underwater, there are still more than 1.2 million properties currently in some stage of foreclosure. The National Association of Attorneys General pointed out that there are approximately 7.1 million homes with mortgages with negative equity.

It is good to remember that the housing market has not yet fully recovered. Millions of people will be greatly affected by the loss of this tax break and they will continue to struggle without financial aid.

However, there is a slight silver lining for some homeowners who live in California. The state enacted a law in 2010 that protects homeowners from paying taxes on any benefit from a short sale. This means that any mortgage debt forgiven as part of a lender-approved short sale is not taxable income. However, anyone with a modified mortgage that had part of the principle forgiven would still be hurt by the federal law's expiration.

Generally, money that is borrowed and then canceled because of foreclosure or short sale counts as income and that is what is taxed. For example, if you owe $300,000 on a home and can only sell it for $225,000, the $75,000 difference is considered taxable income. Without the tax break, you would owe on that amount.

Without the tax break, the only possible loophole to avoid owing taxes on forgiven debt would be qualifying for an insolvency exclusion. This may not require you to include your forgiven debts as income if you can prove that your total liabilities exceed your total assets, but again, this is a specific loophole that not everyone will qualify for. Be sure to talk to a tax professional to discover any and all options you may have.

There were 42 attorneys general who wrote letters to congressional leaders in an effort to persuade them to extend the mortgage debt forgiveness tax break and understandably, these same attorney generals are outraged that it was allowed to expire. Senator Debbie Stabenow (D-Mich.) said "it makes absolutely no sense. It is, frankly, outrageous. This is not just about fairness for homeowners. This is about keeping the housing recovery alive."

Despite such passionate and high-powered backing of this tax break, it is a shame that Congress allowed it to expire. According to Jaret Seiberg, a senior policy analyst at financial services firm Guggenheim Partners, Washington is basically tired of lending government support for housing. "As a result," he said, "there is a real risk that the government will prematurely pull back support for housing." However, Seiberg believes that there is still a 60% chance that Congress could change their minds and extend the break once more.

We can only wait to see what happens.

If you are concerned about the loss of this tax break and want more information about your options, feel free to call us at Crosscountry Mortgage at (877) 828-8851. We would love to answer your questions and help you evaluate your situation, if needed.

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