Will The Senate extend the Mortgage Forgiveness Debt Relief Act?
Currently we have 14 days left in 2014, and as of today, The US Senate has still not voted on whether this bill, which could cost tax-payers (who clearly do not have the money) millions.
Although short sales are down in 2014, there still were thousands of owners across the country who after struggling with underwater properties, decided to take the risk and negotiate a short sale and debt cancellation from their lenders. In a short sale, the lender allows a new purchaser to buy a house at a price below the mortgage amount owed by the seller. As part of the deal, the lender typically forgives the unpaid balance.
And the risk they still face is this. If the Senate and House do not pass an extension of the mortgage debt relief law here in the last few weeks of 2014, the full principal balance the lenders had written off on mortgages likely will be treated as ordinary income for 2014. Although the sellers never received a dollar of that “income” , the federal government views it as such, and a fairly large tax bill will greet these already down-trodden home sellers. Unfairness at its height.
For example if $200,000 is owed on the mortgage, but the negotiated short sale price is $150,000. Uncle Sam considers your W-2 to be 50K higher, and they expect taxes to be paid on the difference.
In late summer, it appeared that the bill was moving forward, but in typical partisan stupidity, it bogged down as both parties used it as a weapon to further other, less pressing agendas. As of right now most pundits believe that it will pass at the final hour, but that certainly is not written in stone.
Now if the tax bill is high enough, you can claim insolvency. ( Insolvency is where total debt exceeds total assets.) In that case, the taxes owed would be forgiven. That is really the only other way to avoid paying the taxes on this phantom income. Even bankruptcy does not necessarily wipe out a federal tax debt.
So as the hours tick down, we will see.
The other tax credit that will not be available to homeowners is the ability to write off private mortgage insurance. (PMI) Since 2007 the government has allowed anyone who did not have the necessary 20% down payment for a conventional loan to write off the mortgage premium they were paying–dollar for dollar. Well that also expired in 2013, and although there has been some talk of extending it, it does not look promising. It really is a shame too. Obviously anyone who has a mortgage with PMI is already paying a higher monthly sum, and is more likely to benefit the most from this sort of tax relief. But by all means, let’s do away with this tax break, while we continue to subsidize Exxon, and let BOA operate hundreds of tax free locations.