The failure of Congress to renew the Mortgage Forgiveness Debt Relief Act on January 1, 2014 is leaving troubled homeowners in a difficult position regarding their future options. If elected officials in Washington don’t continue the Act, it may not be financially feasible for them to attempt a short sale.
From 2007 to 2013, the IRS provided mortgage tax forgiveness to those homeowners who participated in short sales in the Mortgage Forgiveness Debt Relief Act. Before this initiative was enacted, if a lender forgave $50,000, borrowers still had to pay the income tax on the loan. The act was a way to prevent already financially-strapped homeowners from going into serious jeopardy.
Despite bipartisan support for the bill to continue the Mortgage Forgiveness Debt Relief Act into the new year, the act has been having a hard time getting out of committee in Congress.There are currently two House of Representatives bills and one Senate bill trying to get the act passed. The current Ryan-Murray budget proposal, as it stands, does not include the Act. However, Congressman Bill Foster (D-Illinois) introduced the Homeowners Debt Relief Extension Act (H.R. 3856), which would extend the mortgage debt tax exemption that's been in place since 2007 for another two years.
Attorney General Tom Miller, along with 41 state attorneys, recently gave his support for extending the initiative. “Without this tax relief for homeowners who really need it, families barely making ends meet will face tax bills they can’t afford,” Miller said in a statement. “Congress needs to extend it to help ensure that these families stay in their homes and the housing market recovery stays on track.” Miller also said that not extending the Mortgage Debt Relief Act could cause a serious hindrance to the improving economy.
Miller also got involved last year in the fight to continue the Mortgage Forgiveness Debt Relief Act, which was not renewed on time. After the bill finally passed, it took retroactive effect to help cover homeowners. However, as 2014 brings higher standards for mortgages as well as increased interest rates, the pressure is on to make sure homeowners aren’t penalized.
Although on a national level this deal is having issues, the state of California has remained an exception to income tax as resulting from a short sale. In a letter addressed to Sen. Barbara Boxer (D-Calif.), the IRS and California Franchise Tax Board clarified that short sale debt does not count as recourse debt under the state’s anti-deficiency law, which has been in effect since 2011. This law was used to help prevent homeowners from benefitting from the additional assets of a short sale, but the IRS recently clarified that these laws also make sure that homeowners would not have to face the taxes that come with it.
More than six million households throughout the United States are estimated to be in financial distress, many of which can benefit from short sales.