Weitz - A great piece in the Washington Post today. Rumor has it their is something in writing to extend the law, but Congress hasn't put it to a vote yet. We'll let you know as we hear anything.
There’s a tax break for struggling homeowners that Congress should
not have let expire just before the new year. If it’s not extended, some people
selling their homes could get big tax bills.
As the housing crisis in the middle of the last decade drove people
into foreclosure, many borrowers were not aware that forgiven debt — including
on mortgages — is considered income.
In 2007, Congress passed the Mortgage Forgiveness Debt Relief Act
to help people who were down on their luck financially because of the loss of
their homes.
The concern was well placed. If people couldn’t afford to keep
their homes, sending them a large tax bill just seemed cruel.
The tax exemption played an important role as borrowers who were
unable to refinance their mortgages ended up selling them through so-called
short sales, in which the lender allows the borrower to accept a price that is
less than the amount owed. Often, borrowers trying to get out from under a
mortgage can negotiate to have the remaining balance forgiven.
The tax break was supposed to end in 2009. But it was extended
twice through Dec. 31, because many people still needed help. It was a decent
thing to do. Up to $2 million of forgiven debt qualified for the exclusion ($1
million if married filing separately).
In addition to foreclosures or short sales, debt reduced because
of a mortgage restructuring also qualified for relief.
It might not make sense to have to pay taxes on forgiven debt
because it isn’t money that was earned. You aren’t taxed on borrowed money because
you have an obligation to repay it. However, money you borrow that is then
canceled as a result of a foreclosure or short sale counts as income.
If the debt is forgiven, the lender is required to report the
amount because you no longer have an obligation to repay the money. Let’s say
someone owes $200,000 on a home but can sell it for only $125,000. The
difference, $75,000, would be considered taxable income.
Critics argue that it’s time to move on. Allowing the tax break
means less revenue for the federal government. Additionally, some taxpayers may
be able to still get around owing taxes on forgiven debt if they qualify under
what’s called the insolvency exclusion. You may not have to include forgiven
debts as income if you can show that your total liabilities exceed your total
assets.
Weitz - an exception to the tax is either by filing bankruptcy or insolvency (debts exceed assets), or even foreclosure in some states (including Washington). The reality is that we will push many more clients toward bankruptcy or foreclosure (rather than short sale) which won't be good for the economy.
Yet let’s get real here, folks. This is a tax break that needs to
be restored — and immediately.
Yes, things are a lot better than in the depths of the housing
crisis. In many areas, as housing prices increase, fewer owners are underwater,
meaning they owe more than the home it worth.
However, the housing market still hasn’t fully recovered. Things
are better, but not great. In November, the number of properties that received
a foreclosure filing was 37 percent lower than in the same month a year before,
according to RealtyTrac. But there are still a lot of people who may lose their
homes.
More than 1.2 million properties are in some stage of foreclosure,
RealtyTrac reports. And some states hardest hit by the housing crisis are still
seeing high foreclosure rates. RealtyTrac’s November foreclosure report found
that five states posted year-over-year increases in bank repossessions:
Delaware (179 percent), Maryland (41 percent), Connecticut (9 percent), Maine
(6 percent), and Iowa (2 percent).
Weitz - more than 1.2 Million homes in foreclosure status...that is still staggering...and why we don't think this real estate rally will persist.
In a letter to congressional leaders in support of an extension,
the National Association of Attorneys General pointed out that an estimated 7.1
million homes with mortgages, or 14.5 percent nationally, are still in negative
equity.
“We continue to believe that this relief is crucial to both the
homeowners struggling to regain their financial footing and to the battered
housing market whose recovery is slow and still uncertain,” the attorneys
general said.
As part of JPMorgan Chase’s $13 billion settlement with the
Justice Department and other federal and state partners stemming from
misrepresentations about mortgages that were sold, the bank agreed to include
consumer aid in the form of forgiveness of portions of people’s principals. Certainly
borrowers who might get some of their mortgage debt forgiven as part of that
settlement or others because of misconduct by financial institutions shouldn’t
face a tax bill.
Extending the mortgage forgiveness tax break is the right thing to
do.
Weitz - Agreed! Wake up, Congress! Lets extend this law. We bailed out the banks with real government money. All you are doing is adding insult to injury for folks who lose their primary residence.
For more information contact a
Kirkland Real Estate Broker.
