WASHINGTON – Dec. 5, 2014 – A bill that would extend a key tax break to tens of thousands of financially distressed homeowners who sold their homes this year for less than they owed passed the U.S. House on Wednesday and is headed to the Senate for consideration.
A one-year extension of the Mortgage Debt Forgiveness Act, which expired Dec. 31, 2013, was included in the Tax Increase Prevention Act of 2014 and passed the House on Wednesday on a 378-46 vote. Dozens of other temporary tax breaks that expired but would get a reprieve until the end of this year under the measure include those for home energy improvements and mortgage insurance premiums.
But for homeowners who gambled this year and sold their home through a short sale, unsure about the tax ramifications, this is the one foremost in their minds, as it is for the housing market in general.
Traditionally, if a lender allows a homeowner to sell a property for less than the amount owed on the mortgage, the homeowner has to report that forgiven debt as taxable income to the Internal Revenue Service. The Mortgage Debt Forgiveness Act of 2007, which had been extended multiple times, allowed taxpayers to exclude that forgiven debt from their annual income calculations.
The tax break lapsed in 2013, forcing homeowners to either gamble that it would be revived and proceed with a short sale or remain in homes that they either couldn't afford or couldn't sell because the mortgages were underwater.
An analysis earlier this year by the Urban Institute concluded that uncertainty over whether the tax break would be renewed could affect up to 2 million seriously underwater borrowers, including some who would eventually fall into foreclosure.
The Joint Committee of Taxation has estimated the package of tax extensions would cut revenues by almost $45 billion over a 10-year budget window.
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