Mortgage tax relief plan may disappear
WASHINGTON — The Mortgage Forgiveness Debt Relief Act is set to expire in 10 months, and there are early indications on Capitol Hill that it might not make the cut. The law, first enacted in 2007, allows homeowners who have received principal reductions on their mortgages as the result of loan modifications, short sales or foreclosures to avoid income taxation on the amounts forgiven.
Loss of that tax help would endanger huge numbers of distressed mortgage arrangements in the months ahead. Yet election-year politics and a contentious lame-duck, year-end congressional session loaded down with tax and budget issues could doom renewal of the debt relief tax legislation and put large numbers of loan modification participants deeply in the hole. Republican strategists say the cost of continuing the program — $2.7 billion for two years — is substantial enough to catch the eyes of budget-deficit hawks. Beyond that, they add, some members of Congress may be opposed to what they see as still another targeted federal benefit for people who didn't pay their mortgages — subsidized by taxpayers who did the right thing and stayed current on their loans, even while underwater or facing severe financial distress.
Douglas Holtz-Eakin, president of the center-right American Action Forum, former director of the Congressional Budget Office and economic adviser to Sen. John McCain's 2008 presidential campaign, said in an interview that there is "a powerful sentiment," especially among conservative freshman House members supported by the tea party, that tax code "bailouts" to delinquent and underwater homeowners are unfair.
Here's what's involved, and how it might affect someone contemplating a short sale or loan modification that involves debt forgiveness. Prior to 2007, all cancellations of debt by creditors were treated as taxable events under the federal tax code. If you owed $200,000, but paid off only $150,000 through an agreement with the lender, the $50,000 difference would be ordinary income, taxable at regular rates.
Under the debt relief law for qualified homeowners, you can avoid taxation on forgiven mortgage amounts up to $2 million (married filing jointly) and $1 million for single filers. To be eligible, the debt must be canceled by a lender in connection with a mortgage restructuring, short sale, deed-in-lieu of foreclosure or foreclosure. The transaction must be completed no later than Dec. 31.
That impending deadline — and the risk that Congress won't reauthorize the law in time — has real estate professionals and tax planners on edge. Given the long timelines needed to complete such transactions, "anybody thinking about doing a short sale this year needs to get moving on it now," said Harrison K. Long of Coldwell Banker Residential Brokerage in Irvine, Calif.
Kenneth R. Harney can be reached at email@example.com.