Distressed Homeowners Face Additional Tax Burden in 2013

Let’s face it. It’s an election year and politicians are notorious for doing whatever it takes if they think it will put them in the good graces of voters. Even if that means taking on the Internal Revenue Service.

The Mortgage Debt Relief Act of 2007 is due to expire at the end of this year, and a few members of Congress are supporting proposed legislation being offered up in the 11th hour of a lame duck session just in time to extend the Act for at least another year. Currently the law exempts homeowners who receive a principal reduction on their mortgage (a loan modification or short sale) from incurring any tax liability for the amount of the forgiven amount.

At the moment, two lawmakers have proposed legislation to stave off the tax man for at least another year. In her bill (S.2250), Sen. Debbie Stabenow, D-Mich., proposes an extension of the law though the end of next year. Her bill has gained support from both sides of the political aisle. A bill backed by Rep. Jim McDermott, D-Wash., (H.R.4290) is more extensive, including everything that Stabenow’s bill covers plus allowing for no taxation of direct cash payments to homeowners from the $25 billion national mortgage settlement. McDermott’s bill, however, only has the support of his Democratic comrades at this time.

Here are two potential outcomes as of Jan., 1, 2013, if the Act is not extended, according to a story on salon.com:

  • Millions of families could stand to pay billions of dollars in taxes since the amount of any debt forgiveness completed after that date would be counted as gross income for tax purposes.
  • Anyone completing a short sale after the date would be liable for taxes on any amount forgiven by the bank when it agrees to accept less than the amount owed on the existing mortgage in order to consummate the short sale.

The article’s author suggests that this would amount to hitting distressed homeowners while they are already down on the mat, facing the loss of their home to foreclosure, and “could significantly disrupt a still fragile housing market and rob homeowners of the tools to pull themselves out of mortgage debt.”

Is the purpose of the law to help out homeowners who cheated the system from suffering the consequences of their own greed? I don’t think so.

Real estate is an important driving factor of the American economy. Without a healthy real estate market, we cannot have a good job growth and prosperity. So in essence, a lot is riding on this.

What is your take on the need for debt forgiveness in this time of economic uncertainty? We’d like to hear from you.

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