Will Homeowners Forgive Congress?

Despite the fact that many homeowners in 2014 are barely making ends meet, Congress decided not to extend the Mortgage Forgiveness Debt Relief Act (the “Act”), which was passed in 2007, to help struggling homeowners. The Act held that homeowners would not be taxed for mortgage debt that was forgiven by lenders whether as a result of a loan modification or in connection with a foreclosure.

For example, prior to 2007 (and now the current law in 2014), if a homeowner owed $300,000 on their mortgage but the property was sold for only $250,000 in a foreclosure sale, then the IRS would treat that $50,000 of loan forgiveness as taxable income. The Mortgage Forgiveness Debt Relief Act (in effect from December 20, 2007 until December 31, 2013) said that the IRS would not treat that $50,000 in loan forgiveness as income to the homeowner if the loan was on their principal residence.

The ramifications of this decision not to extend the Act for struggling homeowners will have negative consequences. Common sense would suggest that this decision will not help the real estate market, which is already slowly recovering in many parts of the country. If homeowners facing foreclosure are hit with a tax bill, they will have even less money to spend to fuel the economy. Congress should consider extending the Act for at least another year. Posted 1.24.2014