Homeowners Who Negotiate Debt Relief Could Soon Face Massive Tax Bill

Homeowners Who Negotiate Debt Relief Could Soon Face Massive Tax Bill

by Lois Beckett ProPublica

Answers to homeowners’ questions about the Independent Foreclosure Review.The administration’s website for the foreclosure prevention program. Provides an FAQ, homeowner examples, and other tools to see whether you might qualify for the program.A list of HUD-approved housing counseling agencies nationwide.Tips for homeowners from the Federal Trade Commission.These rules lay out how mortgage servicers are supposed to conduct the program.A finance and economics blog that provides news and metrics on the state of the housing market.

Feb. 23: This post has been updated.

You bought your house when the market was high and then lost your job. In order to avoid foreclosure, you negotiated a short sale for half of what you paid, ruining your credit rating for years and draining your bank account. But there is a tiny silver lining: Thanks to a 2007 law, you don’t have to pay taxes on the $100,000 of debt your bank forgave as part of the short-sale agreement.

This week, real estate columnist Kenneth R. Harney pointed out that this important tax break will expire at the end of 2012 — and, because of opposition from conservative members of Congress, might not be renewed.

The Mortgage Forgiveness Debt Relief Act of 2007 ensures that homeowners who restructure their mortgages or short-sell their homes don’t have to pay taxes for reducing part of their debt.

Without the law, any cancelled debt typically counts as income. So an underwater homeowner who negotiated a principal reduction on her mortgage would have to pay taxes on that amount of “income.”

The law creates an exemption for up to $2 million of forgiven debt on a taxpayer’s primary residence.

Harney pointed out that the debt relief act provides a crucial underpinning to last month’s $25 billion mortgage settlement, which requires five of the country’s largest private loan servicers to provide $17 billion in principal reduction and other forms of foreclosure avoidance.

And given the importance of mortgage modifications and principal reductions to the Obama administration, you might think that the law would be on the fast-track towards further extension. (It was extended once before in 2008.)

But Harney reported that some conservative members of Congress may not approve of the program’s $2.7 billion price tag, or of provisions they might perceive as a federal “bailout” of underwater homeowners.

“It’s going to be an uphill fight” to get the law extended, economist Douglas Holtz-Eakin, a former McCain adviser, told Harney.

The debt forgiveness act originally had broad bipartisan support: It passed in the House of Representatives on a 386-to-27 vote. But among the Republicans who voted against the law in 2007 was now-Speaker of the House John Boehner. Boehner’s office has not yet responded to a request for comment.

New York Democratic Congressman Charles Rangel, who sponsored the law, said that he plans to reintroduce it soon as part of this year’s tax extender package.

“The issue for all the extenders is how we pay for them,” Rangel said in an emailed statement. “While there may be resistance, this extension may very well be driven by public concern. Many of our nation’s homeowners are still hurting from a housing crisis that has brought great financial instability and uncertainty — they demand help and we must make sure their voices are heard.”

The National Association of Realtors, which supported the original bill, is planning to make a “strong push” to get it re-extended.

“In light of how hard home owners were hit in the market downturn, it was unrealistic to expect households to pay tax on tens of thousands of dollars on forgiven debt when they lack money to pay their mortgage without a modification,” Robert Freedman wrote on the association’s Realtor Magazine blog.

In a video interview on the site, NAR’s director of tax policy, Linda Goold, said there would be “very, very serious economic repercussions” if lenders and borrows remained uncertain about whether the law would be extended.

She said that the mortgage provision would be one of many tax laws expiring at the end of 2012, creating “an environment of remarkable chaos.”

“Congress has always lumped the expiring conditions into one big package,” Goold said. “That package has usually been, if not one of the very last things Congress did in December, pretty much close to the last thing Congress has done.” She noted that it was unlikely that Congress would pass a single tax exemption separately from the others.

“It’s the inability to get the process rolling that’s our biggest obstacle,” she said.

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4closurerFraud.org

Comments
6 Responses to “Homeowners Who Negotiate Debt Relief Could Soon Face Massive Tax Bill”
  1. incognito123 says:

    It’s us evil deadbeat homeowners again causing all this chaos – NOT!!!!

  2. Sent a 1099 on home that was current residence, wrote to AIG CA, Gov, housing whoever, then received a sorry disregard the notice, now I receive it again??? goes to show you, the banks only follow the rules while someone is watching, as soon as they can, they go right back to plaln B, and when are they going to stop asuming without even checking/asking facts? forcing homeowners into bankruptcy even after short sell, it is all lies, and giving breaks to banks on short sell is really the priority, it doesn;t do thing for the homeowner, unless you get 3000 to move on, which of coarse they give it too you after you have had to move it all yourself, give everything away or whatever?? they asume we are all collecting rents, employment paychecks and living the good life, maybe they should check into the real world, most are drowning!

  3. Pamela Edwards says:

    This is what you get for trying to play fair and the ever changing laws.My question is why was this not made permanent from the inception.WTF we always end up poaying all the bills,right wrong or otherwise.If we don’t step to the plate and put these guys out of thier misery we are going to have bigger problems than we do right now.This situation just seems to be escalating not getting better!!!!

  4. Underwaterguy says:

    “The issue for all the extenders is how we pay for them, ” Rangel said.

    The banks have ALREADY been paid for them, with billion$ of TARP funds. Now it’s time to let that credit trickle down to those of us who really lost when the housing bubble popped — the homeowners.

  5. readdocs says:

    So the taxpayer ends up paying anyway. Penalized due to the fraudulent behavior of those
    in control.

  6. Katheryn says:

    How much more do these monsters want from people who have already lost everything? Hateful greedy bunch they are. Where does this greedy bunch think these people will get thousands of dollars to pay this tax even if it is passed. Are garnishment of wages next in their war on the 99%? They’re all NUTS.

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