There is potentially good news for underwater homeowners: The Mortgage Forgiveness Debt Relief Act may be extended through 2013.
As it stands now, the tax relief measure is set to expire at the end of this year. Orange County Foreclosure Lawyer Vincent Howard of HOWARD LAW knows that will create an expensive tax nightmare for millions of underwater homeowners.
The Senate Finance Committee, just prior to going on its summer recess last month, signed a bipartisan bill that would essentially give the measure an extension through the end of next year.
The reason this matters is that under normal circumstances, if you lose your home to foreclosure or sell it in a short sale, you have to pay taxes on the difference between the sale amount and what you owe. That amount is essentially "forgiven" by the bank, but the federal government considers it "income." This means it is taxable - even if you never earned a penny.
So for example, if owe $100,000 more on your home than what it's worth, and the bank forecloses on it or you are able to short sale it, the bank agrees not to hold you responsible for the $100,000 (it's already got the house, or, if a short sale, whatever smaller amount in cash). However, the government will tax you as if you actually earned another $100,000. That could bump you up several tax brackets, and have you owing 28 to 33 percent on it. In other words, you could owe anywhere from $28,000 to $33,000 to the federal government.
But this is where the mortgage forgiveness act was so important. This measure was passed in 2007, and it also allows debt balances to be written off for those who are able to work out a loan modification agreement. This is important because a big chunk of the $25 billion robo-signing settlement was to compel banks to enter loan modifications. But if homeowners are going to be taxed on the amount "forgiven," then it may be a wash anyway.
That's why it's critical for Congress to extend this bill.
A two-year extension would cost about $2.7 billion, though as of now, only a one-year extension is proposed.
Legislators are slated to revisit the issue again this month, and it's hoped that despite the fractious and contentious atmosphere due to the impending November election, lawmakers will band together to help struggling homeowners.
The concern is particularly with regard to newer, Tea Party candidates, who may view the measure as a "bailout." But if steps aren't taken, the economy will experience a greater stifling, as more people will be filing for bankruptcy because they won't be able to afford to keep their home - but they won't be able to afford to lose it either. Bankruptcy is often a smart option for those struggling with debt - but it's not great for the economy when people do it in droves.
Working to prevent foreclosure through loan modifications is a better way to address pending foreclosure.
Our clients benefit from our depth of experience in both bankruptcy and foreclosure defense, so we can help homeowners choose the option that is going to make sense for their individual circumstances.
Underwater debtors may get tax relief, By Kenneth R. Harney, Washington Post