Homeowners have been celebrating in recent years with the new opportunities they have had to reduce their mortgage debt. Using a law that went into effect in 2007 to provide a special debt and tax exemption, homeowners who can no longer afford their mortgage payments may have been able to reduce their mortgage balance by as much as $2 million.
A number of homeowners are still receiving mortgage debt relief under this tax bill, as investigators had found that the United States’ largest banks had abused homeowners with their foreclosure practices. However, the law that has provided this reduction will soon expire, as it is to sunset at the end of 2012, along with a number of other tax-reduction measures that were put in place during President George W. Bush’s terms in the White House. If the debt and tax relief laws are allowed to expire, that could mean a huge tax bill for many homeowners, a fact that has a number of those who are in support of making housing affordable worried.
“The expiration of that provision is a hidden time bomb,” noted Representative Jim McDermott of Washington. Representative McDermott as well as a number of others in Washington, D.C., are already stating their desire to extend the special debt and tax exemptions when they return to work next week. But even though extension of these measures is receiving support from both Republican and Democratic sides of the House, a vote on the extension is not expected before the Presidential election in November.
That could mean trouble for homeowners, as Congress is not expected to vote on the matter by the end of the year either, as their attention will likely be on the budget shortfalls facing the nation.
“We are actively looking for opportunities to extend the provision, and we would hope we could do that well before the end of the calendar year,” said Housing and Urban Development Secretary Shaun Donovan.
When a bank forgives a homeowner of mortgage debt, whether by reducing the principle owed or accepting a short sale or a foreclosure sale for a lower amount, the amount forgiven has historically been considered income to the homeowner. This income is reported by the bank to the Internal Revenue Service for income tax purposes.
But the Mortgage Forgiveness Debt Relief Act passed in 2007 created an exemption to this tax on up to $2 million in forgiven mortgage debt, if the mortgage debt forgiven was related to a drop in the value of a home or in a significant change in the financial position of the homeowner.
The Mortgage Forgiveness Debt Relief Act was originally set to expire at the end of the 2010 calendar year. But lawmakers determined that has the housing market was still in turmoil as that deadline approached, they extend the relief measure until the end of 2012.
Should the act be allowed to expire, that means that any who receive mortgage forgiveness on January 1 or later will again face the prospect of paying income tax on the debt forgiven, which can add up to tens of thousands of dollars for many.
- Delaware State Income Tax Overview (taxlawhome.com)
Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.