Hat tip to daytrip for sending in this article from the latimes.com alerting us to the expiring The Mortgage Debt Relief Act of 2007, wrapped around the free cheese in the recent JP Morgan settlement:
http://www.latimes.com/business/hiltzik/la-fi-mh-homeowners-20131029,0,6953798.story#axzz2jD09ygWq
David Dayen spots a new blow for underwater homeowners that thus far has flown under the radar: the coming expiration of the Mortgage Forgiveness Debt Relief Act of 2007, scheduled for Dec. 31.
The act is a mouthful, but it’s been a crucial factor in helping countless families get out from under bad mortgages. Simply put, the act relieves homeowners from having to pay taxes on any loan forgiveness they receive in a mortgage restructuring. (The maximum exemption is $2 million for a couple.) The measure was originally set to expire last Dec. 31, but it was extended another year by the fiscal cliff deal.
The foreclosure crisis is ebbing, but the relief is still needed. Millions of families are still underwater and facing delinquency, default, and foreclosure. As Dayan notes, those who succeed in obtaining principal reductions will be getting a bill that’s almost certain to be unaffordable.
As an additional irony, the act’s expiration comes just as JPMorgan, one of the banks that contributed massively to the housing crisis, reaches a deal that gives it a tax break on its multibillion-dollar settlement of federal charges related to the disaster.
He suggests folding an extension of the homeowner relief act into the JPMorgan settlement, but the extension looks like something that would have to clear Congress all by its lonesome. What are the chances of that? Congress has a lot to do as the end of the year looms. Somehow the things that aren’t on its agenda are all needed to help the less advantaged of society — food stamp extensions and now mortgage relief. Come New Year’s Day, we’ll be asking once again: Who do the people on Capitol Hill work for?
So they have been squatting (or at least living above their means, not paying down their mortgage) for six years, and need tax relief so that they can do so for another six?
And they are more deserving than someone declaring bankruptcy due to a health crisis, for instance?
I think there are still lots of people getting a free ride every month.
They are living it up and buying new cars and eating out a lot.
moral hazard got thrown out the window.
They have had ample notice.
The tax exemption was supposed to expire last year, so they got an extra 12 months to get out tax-free.
From the LA time article: “Simply put, the act relieves homeowners from having to pay taxes on any loan forgiveness they receive in a mortgage restructuring.”
Wrong.
Almost nothing in the Internal Revenue Code can be “Simply put”.
In order to qualify for relief under the Debt Relief Act of 2007 on ordinary income taxation of cancellation of indebtedness, whether by short sale or some other way indebtedness or some portion thereof gets canceled, one needs to review Internal Revenue Code Sections 108(e) and Section 163(h)(3). “qualified principal residence indebtedness” which is discharged is excluded from ordinary income. Qualified principal residence indebtedness includes refinanced acquisition indebtedness and cash out for improvement of the property but does not include:
“ any indebtedness (other than acquisition indebtedness) secured by a qualified residence to the extent the aggregate amount of such indebtedness does not exceed – (I) the fair market value of such qualified residence, reduced by (II) the amount of acquisition indebtedness with respect to such residence.”
So is someone took cash out to by a boat, investment property, car, vacation, etc., cancellation of that indebtedness does not get excluded from ordinary income under the Mortgage Forgiveness Act. It protects those who cancel debt used to acquire the property or who improved their property. One can associate the act with deadbeat cheese and politic views all they want, but I think the act makes a lot of sense as people who bought too high and then the value plunged on them should not be further penalized for getting out of their situation. They really did not benefit financially from the debt being canceled as the price they paid in the first place was never “real”. They ought to make this act permanent instead of trying to tax something that was never a real benefit to a homeowner.
@Kingside…so let me ask you this, what are your thoughts regarding renters whose rents went up — and are still escalating today — as a result of skyrocketing prices? They have zero monetary relief as a consequence of any bubble, they provide a vital service to property investors, and they have no tax relief because they own nothing.
As far as I’m concerned, underwater homeowners can have all the tax relief they want, but if they can’t make their payments, they need to get the he!! out of their properties and go rent. No mods, no writedowns, no cramdowns, do not pass GO, do not collect $200. Just get out. And I’m writing this response as sympathetically as I can muster…
If increasing prices are a result of low inventory, then the tax relief act is one renters should support. An underwater who is not getting tax penalized is more likely to short sale. Those who are looking at a tax hit are more likely to try to hold on until they are no longer underwater.
Not many government polices encourage weak hands to move on, but the tax relief act is one of the few.
Agreed, renters don’t get government bailouts unless they are section 8. It has pretty much always been this way. Renters can either get angry about it or buy a house.