For the last ten years, underwater borrowers who either faced foreclosure or short sale were able to escape further financial burdens by cancelling their mortgage debt with the IRS. While the provision of mortgage debt cancellation was renewed many times over the last several years, it was a consistent part of a tax extenders bill that would pass early in the year and retroactively apply the provision. So far in 2018, the mortgage debt cancellation provision is expired and no tax extenders package has passed the U.S. Congress. This means that any homeowners who faced foreclosure or had to sell short sale their home in 2017 will now face a tax bill on the phantom income that the IRS will calculate based on the debt that the lender has forgiven. This causes significant issues for households who are already facing financial pressures and are unlikely to have the ability to pay.
While this issue has diminished significantly as equity has returned in recent years, many homeowners In the Fredericksburg market are still underwater. In 2017, there were 497 bank-mediated sales, representing 8% of the total units sold. The number of short sales and foreclosures decreased every month from the previous year, which is good news, but those nearly 500 families will be the first people responsible for paying taxes on their forgiven mortgage debt since 2007 if this provision is not extended again. NAR recently testified before the U.S. House of Representatives Ways and Means Committee that the mortgage debt cancellation provisions should become permanent in the tax code. Read the full article about NAR’s testimony below.
Realtors® Urge Permanent Mortgage Forgiveness Debt Exclusion
WASHINGTON (March 14, 2018) — The exclusion for forgiven home mortgage debt following a foreclosure, short sale or loan modification should be made permanent to provide relief to troubled borrowers and minimize the damage to families, neighborhoods and communities.
That’s according to testimony (link is external) today from the National Association of Realtors® before the U.S. House Ways and Means Subcommittee on Tax Policy at a hearing evaluating recently expired tax provisions.
NAR has long advocated for mortgage forgiveness tax relief, policy that was first established in 2007 at the onset of the housing and economic downturn and that has expired and been extended several times; most recently, early in 2018, it was retroactively extended to cover 2017. Without the exclusion, the debt that lenders forgive is considered taxable income and adds a tax burden at a time when an individual or family has experienced a true economic loss. NAR believes most of these people are already in financial distress and likely unable to pay additional taxes.
“The exclusion for mortgage debt cancellation delivers a huge dose of fairness. When the investment in a home goes well, and the owner sells at a gain, the tax code generously waives capital gains up to $500,000,” said Realtor® Barry Grooms, 2018 vice president of Florida Realtors®, who testified on NAR’s behalf. “But what happens when things go sour, equity is lost and the family is forced to sell short? Up through last year, the exclusion stepped in and relieved the often-impossible tax burden. If allowed to expire, we are left with a tax policy that rewards good fortune but piles on when the tables are turned. This is neither fair nor smart.”
While the home equity situation in America is much better today and the volume of short sales and foreclosures has receded from record highs, there are still about 2.5 million homes underwater, according to industry data. This is down considerably from the downturn, when as many as a quarter of mortgaged homes in the U.S. had negative equity. Nonetheless, there are still a significant number of individuals struggling to keep up with their mortgage payments, and the exclusion is vital for lessening the financial impacts of a foreclosure, short sale or loan restructure and saving distressed families from a dire hardship.
In his testimony, Grooms urged Congress to make mortgage cancellation relief a permanent provision since the exclusion has already expired, leaving the future of troubled borrowers in serious doubt.
“Cases of negative home equity will ebb and flow as well, even with a stronger economy,” said Grooms. “This is why we need a permanent exclusion to minimize the damage to families, neighborhoods and communities.”
Additional information on NAR’s mortgage debt cancellation tax relief efforts is available at www.nar.realtor/topics/mortgage-debt-cancellation-relief .
The National Association of Realtors® is America’s largest trade association, representing 1.3 million members involved in all aspects of the residential and commercial real estate industries.
© National Association of REALTORS®
Rep. Vern Buchanan (R-Fla.), chairman of the U.S. House Ways and Means Subcommittee on Tax Policy, speaking with Realtor(R) Barry Grooms.