WASHINGTON – Jan. 6, 2014 – To the dismay of housing advocates, industry groups, and U.S. legislators, a tax break for distressed homeowners who mortgages were written down expired on Dec. 31.
The 2007 measure exempted borrowers from federal taxes they normally would owe on assistance received from banks, primarily in the form of a seller’s forgiven home loan debt in a short sale.
If a lender approves a short sale that’s $10,000 less than the seller owes on the home, for example, the lender absorbs the $10,000 loss. However, the IRS considers that $10,000 money that the seller made on the deal since he no longer owes as much to the bank. As a result, the IRS expects the seller to report that $10,000 as income – even if he never saw the money – unless Congress extends the tax break.
Although the residential property market is in recovery, housing advocates contend that the market still needs this tax break that was put in place after the crash. More than 6 million homeowners in this country still owe more on their mortgages than the underlying properties are worth, they say, and failure to renew the tax break would only increase their financial burden. A report by the Congressional Research Service calculates that a middle-income homeowner who is granted a $20,000 reduction in mortgage debt could expect to owe $5,600 in federal taxes under the new reality.
“It makes absolutely no sense,” says Sen. Debbie Stabenow (D-Mich.). “This is not just about fairness for homeowners. This is about keeping the housing recovery alive.”
Many of her colleagues agree, given the broad bipartisan support for an extension of the law. While Congress went on holiday break without taking action, it could revisit the issue as soon as next week, possibly passing a retroactive extension.
However, an extension is not guaranteed. Owners considering a short sale currently should seek advice from a professional tax consultant or attorney.
Source: Los Angeles Times (12/31/13) Puzzanghera, Jim
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