In 2007 the federal government was faced with a dilemma. The economy was diving and housing was at the tip of the downward facing arrow. Home prices started to plummet and the negative amortization spiral accelerated in 2008. People were having to sell their homes for less than what they owed the bank. The term “Short Sale” became an infamous industry phrase and homeowners trying to sell were in need of mortgage debt forgiveness.
The issue…Let’s say you have a home mortgage in the amount of $300,000 and your home is only worth $240,000 (20% less). You have to sell your home and do not have enough money to pay the loan. You get an agreement of sale and ask the mortgage lender to accept the agreement and forgive the balance, “Short Sale”. The lender agrees and everyone is happy right? One problem. The IRS looks at this as a $60,000 gain by the seller. The seller has to list this on their tax report as income. Ouch!
The federal government came up with a novel idea called the Mortgage Forgiveness Debt Relief Act. In a nutshell The Mortgage Forgiveness Debt Relief Act was introduced in the United States Congress in September of 2007, and signed into law by President George W. Bush in December of that same year. The act offers relief to homeowners who would have owed taxes on forgiven mortgage debt after facing foreclosure. The act extends such relief for three years, applying to debts discharged in calendar year 2007 through 2009.
With the Emergency Economic Stabilization Act of 2008, this tax relief was extended another three years, covering debts discharged through calendar year 2012. In 2012 the Act was further extended until January 1, 2014. There you have it.
The Mortgage Debt Forgiveness Relief Act expired January 1, 2014 and has not been extended by congress. This means many homeowners may now be on the hook for gains due to selling their homes short of what they owe. This is known as the “Short Sale Tax”.
Some argue that it’s time to move on. Allowing the tax break means less revenue for the federal government. This type of thinking may be dangerous. The present housing market is just starting to recover. In 2013 ten of the twenty top real estate markets in the United States were up double digits. While this was true in larger markets, there were plenty of smaller markets that were, and are, taking a beating.
The federal government seems to be playing some kind of game by using the housing market, one of our largest economic factors, like a litmus test. Kind of sounds like the health care situation. Making, or in this case not making, moves of this magnitude, which may inhibit the growth of the economy which historically has been fueled directly from the housing market, may not be the best thing.
Ok, so how does not extending the Mortgage Forgiveness Debt Relief Act affect the average homeowner? Maybe it is good if we stop giving tax breaks. There is a larger picture.
Let’s say your neighbor or neighbors are not doing well financially. They have to list their home for sale. It may have to be sold short of what they owe. Instead of hiring a real estate agent to sell the home, they decide to just move out and let the bank foreclose on the property.
While a short sale is not pretty, it is a lot better than a bank foreclosure. The property being sold short is managed by a professional REALTOR® and shown to prospective buyers. It is a very conscious effort on the homeowners’ part to do the right thing for the neighborhood. A bank foreclosure can take a long time. Maybe years. This degrades the look of the neighborhood. No one likes to talk about the home that nobody knows what happened to. Is it for sale? Why is the grass so long? Does anyone live there? Sounds like a home price downer to me.
With 6.4 million homeowners still underwater on their mortgages, the government aid may still be needed.
There is still a chance! The Homeowners Debt Relief Extension Act (H.R. 3856) was introduced by Congressman Bill Foster (D-Illinois), bravo! This bill would extend the mortgage debt tax exemption for another 2 years. The bill would ensure that any qualifying cancellation or reduction of mortgage debt would not be considered taxable income.
The proposal calls for the costs of the extension to be offset by repealing a tax break in the Internal Revenue Code’s Section 199 for oil and gas companies. Foster says the Section 199 deductions are no longer necessary since oil and gas companies are making billions in profits each year.
Many of us may agree that removing a tax break from Oil & Gas companies that are making billions in profits to help struggling Americans down on their luck is a good idea.
I have nothing against Oil and Gas companies but empty houses burn no fuel, just the value of the neighborhoods they are in.
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