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Posted by on Aug 20, 2012 in Bailout, Loan Mods, Mortgage News | 10 comments | Print Print

Debt-Tax Relief Goes to Full Senate

From NMN:

The Senate Finance Committee approved a bipartisan bill before summer recess that would extend the Mortgage Forgiveness Debt Relief Act through 2013.

The debt relief law spares homeowners who receive principal reductions on their mortgages from being hit with federal income taxes on the amounts forgiven. Without it, millions of owners who go through foreclosure or leave their homes following short sales would experience even more financial stress by being taxed on the amount of debt that the lender forgave in the short sale or that was not recovered in the foreclosure sale. The law has provided relief to thousands of people who have debt balances written off as part of loan-modification agreements is set to expire at the end of December 2012.

The bill now moves to the full Senate for possible action next month, also would extend tax write-offs for mortgage insurance premiums for 2012 and through 2013, and continue some energy-efficiency tax credits for remodelings and new home construction.

The mortgage debt relief extension affect millions of families who are underwater on their loans, delinquent on their payments and heading for foreclosure, short sales or deeds-in-lieu of foreclosure settlements. Under the federal tax code, all types of forgiven debt are treated as ordinary income, subject to regular tax rates. When an underwater homeowner who owes $300,000 has $100,000 of that forgiven as part of a modification or other arrangement with the bank, the unpaid $100,000 balance would normally be taxable.

In 2007 the Mortgage Debt Relief Act agreed to temporarily exempt certain mortgage balances that are forgiven by lenders. The limit is $2 million in debt cancellation for married individuals filing jointly, $1 million for single filers. This special exemption, however, came with a time restriction. The current deadline is Dec. 31, 2012. Without a formal extension by Congress, starting on Jan. 1 all mortgage balances written off by banks would be fully taxable.

There are five bills in Congress, so hopefully one of them will make it through for the homeowner.

10 Comments

  1. Excerpt from the linked article:

    The 2007 exemption already has been extended once and is not considered costly. According to Congressional estimates, tax receipts from the forgiven debt would total only $1.3 billion from 2008 to 2017.

    The tax exemption also has attracted bipartisan support. “It’s been extended before, and my assumption is they will” extend it again, Brent White, a professor at the University of Arizona’s Rogers School of Law, says of the tax exemption. “But who knows with this Congress.”

    Extending relief to stressed homeowners does seem a no-brainer with millions of mortgages still underwater. But at the start of the 2012 Congressional calendar year, there appeared to be little discussion of the matter in policy circles, and lobbying plans by trade groups like the National Association of Realtors and the Mortgage Bankers Association were only in their nascent stages.

    Even if the issue had generated more buzz by now, some observers question whether a House agenda under Republican control would include a measure top leaders believe might encourage irresponsible homeowners to walk away from their obligations scot-free. “There’s a camp that blames some of the default activity on … having the Mortgage Forgiveness Debt Relief Act in play,” says Anthony Sanders, a real estate professor at the Mercatus Center at George Mason University.

    Just how large that camp is remains unclear. Only 27 Republicans voted against the original 2007 bill, which was written by Rep. Charles Rangel, D-N.Y., and handily passed the House before sweeping through the Senate with unanimous consent. But that was before the Tea Party.

    Moreover, a look at the 2007 roll call shows that two of the “no” votes came from GOP members who are now heavyweights on the Ways and Means Committee-through which the original bill traversed.

  2. Wouldnt it be nice if the government instead rewarded those who made prudent financial decisions – like not buying at the top of the market or treating one’s home as an ATM? Funny how that discourse doesn’t even exist.

    Why bother putting in the time to research any financial decision if the government is simply going to absolve all of us of any accountability for our stupid decisions.

  3. “According to Congressional estimates, tax receipts from the forgiven debt would total only $1.3 billion from 2008 to 2017.”

    The math doesn’t seem to add up. Even if you assumed the lowest tax rate of 10% you’re telling me total mortgage write offs are only $13 billion. That’s equivalent to 130,000 homes over a 10 year period at a write off of $100,000 per home or about 15,000 homes per year across the nation. San Diego County alone has probably been averaging about 10,000 distressed sales per year.

  4. ahhh it’s the law that lets people strategically default with no consequences.

  5. Honestly this tax never made that much sense to me… Sounds like it applies for a deed in lieu (how my previously bank-owned house was acquired), but does not apply if the property goes to the courthouse steps?

  6. The theory behind cancellation of indebtedness tax is that If I loan you 10K and you only pay me back 5K, then you get taxed on the 5K you did not have to pay back and kept. It is income you made.

    But in the real estate context, where the loan is tied to an asset that depreciates this theory can breakdown.

    Hence, the Mortgage Debt Relief Act is designed to not tax cancellation of “acquisition indebtedness”, defined in the act as purchase money indebtedness, refinance of purchase money indebtedness, and money used to improve a personal residence. The act does not apply to cash out loans not used to improve a personal residence. Those remain subject to taxation.

    I think it is a pretty fair relief act. It also lets weak hands release inventory to stronger hands without a penalty. IMHO it is good policy to extend it and not a “bailout”. The idea that government should receive tax on a transaction where the homeowner never took cash out and lost their property through foreclosure or short sale is actually kind of stupid.

  7. What do you think about the loan mods being exempt too? There has to be plenty of those that were cash-outs.

  8. Well that is more of a theoretical issue from what I have seen. Not that many principal reductions are really happening, and if they were cash out loans for other than home improvement being reduced, than the tax bite will still hit, even with the Tax Relief act in place.

    But I am still OK with the act applying to loan mods if there was no cash out on the original indebtedness, especially if the principal “reduction” is along the lines of knocking off some accrued interest, or neg am principal increase on an asset whose value has been wacked. Government does not deserve to be compensated for those cancellation situations IMHO.

    Heck, I am even for extending it to non-owner occupied properties, but the act does not go that far.

  9. Fed report confirming what you have been saying all along Jim.

    Federal Reserve Bank researchers studied housing information in 15 metropolitan areas with a focus on single-family homes. “We find that while properties in virtually all stages of distress have statistically significant, negative effects on nearby home values, the magnitudes are economically small, peak before the distressed properties completed the foreclosure process, and go to zero about a year after the bank sells the property to a new homeowner,” the report stated.

    The duration of a foreclosure delinquency also is a factor in maintaining neighborhood prices. The report concluded that in order to maintain home values in a neighborhood affected by foreclosures, it’s important to minimize the time foreclosed homes stay in serious delinquency and bank-owned status. The report noted that a faster foreclosure process is necessary, and that banks should be pressured to sell the properties quickly.

    link:

    http://4closurefraud.org/2012/08/18/federal-reserve-bank-of-atlanta-foreclosure-externalities-some-new-evidence-foreclosures-have-little-influence-on-prices-of-nearby-homes/

  10. From a recent study by the fed. The upshot is that foreclosures don’t reduce values but what does reduce values is having deadbeats live in a home too long after they stop payment.

    “Federal Reserve Bank researchers studied housing information in 15 metropolitan areas with a focus on single-family homes. “We find that while properties in virtually all stages of distress have statistically significant, negative effects on nearby home values, the magnitudes are economically small, peak before the distressed properties completed the foreclosure process, and go to zero about a year after the bank sells the property to a new homeowner,” the report stated.

    The duration of a foreclosure delinquency also is a factor in maintaining neighborhood prices. The report concluded that in order to maintain home values in a neighborhood affected by foreclosures, it’s important to minimize the time foreclosed homes stay in serious delinquency and bank-owned status. The report noted that a faster foreclosure process is necessary, and that banks should be pressured to sell the properties quickly.”

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