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The Nation's Housing: Mortgage forgiveness tax break up in the air

Break on mortgage forgiveness shaky

WASHINGTON — Patrick Boris, a banquet chef in Las Vegas, is inching closer to his own "fiscal cliff," 2,100 miles away from the political brinksmanship under way on Capitol Hill. If Congress and the White House allow the country to go over the cliff later this month, Boris figures he could owe federal income taxes on more than $100,000 in forgiven mortgage debt following the short sale of his two-bedroom townhome next year — a personal financial "disaster," in his words.

In Sacramento, Calif., Elizabeth Weintraub, a real estate broker who specializes in short sales, says "many" of her clients have potentially taxable exposures on $200,000 or more in negative equity balances on their short sales next year if Congress fails to act.

In the Tampa Bay area, Pam Marron, a mortgage loan officer who works with underwater homeowners seeking to avoid foreclosure, says some clients are terrified that Congress could force them into massive federal tax bills after their short sales. "This is ludicrous," she says. "These people already are on the losing end. Now it could get much worse."

Across the country, fears such as these are mounting. The issue is the extension of the Mortgage Forgiveness Debt Relief Act, which is set to expire Dec. 31. Dating to 2007, the law temporarily amended the federal tax code to allow mortgage debt on a principal home that is canceled by a lender through a loan modification, short sale or foreclosure to escape taxation as ordinary income. Several bills have been introduced in the House to extend the law for at least another year, and the Senate Finance Committee passed a bipartisan bill this summer that would do the same. But mortgage debt forgiveness is now on hold in both chambers, effectively a hostage until Congress works out a grand bargain — if it ever does.

Consider this:

• Nationwide, according to mortgage industry estimates, about 11 million owners are underwater — their loan balances exceed the property value. New data generated for this column by real estate information company Zillow indicates that the average negative equity amount of owners who are underwater is $73,163.

The highest average negative equity among owners who are underwater is in Key West, where it exceeds $185,600. In San Francisco, it's $153,194; Los Angeles, $134,400; New York, $126,500, the Northern Virginia suburbs of Washington, D.C., $114,000; Miami-Fort Lauderdale, $99,900; Las Vegas, $99,000; and Seattle, $91,000, to name just a few.

• Federally regulated Fannie Mae and Freddie Mac own approximately 4 million mortgages that are underwater, and as of Nov. 1 began encouraging owners who are current on their payments but facing a financial hardship to apply for short sales that forgive their outstanding loan balances. All participants in these short sales who close after Jan. 1 could be subject to federal taxation on the forgiven balances if Congress does not extend the law.

• Forty-one state attorneys general recently appealed to the House and Senate to pass an extension so as not to disrupt the $25 billion nationwide "robosigning" settlement they negotiated with five major lenders. Among other provisions, the settlement encourages lenders to forgive billions of dollars in mortgage debt next year and beyond. Failure to renew the law, said Nevada Attorney General Catherine Cortez Masto, would cause families who are already facing financial distress to be "stuck with an unexpected tax bill" that could deter them from "participating in this historic settlement."

The Nation's Housing: Mortgage forgiveness tax break up in the air 12/08/12 [Last modified: Tuesday, December 4, 2012 5:35pm]

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